Principles of industrial engineering

PRINCIPLES OF
INDUSTRIAL ENGINEERING

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PRINCIPLES

OF

INDUSTRIAL ENGINEERING

BY
CHARLES BUXTON GOING, M.Sc.

MANAGING EDITOR OF THE ENGINEERING MAGAZINE,
AUTHOR OF "METHODS OF THE SANTA FE," ETC., ETC.

FIRST EDITION
SECOND IMPRESSION

McGRAW-HILL BOOK COMPANY

239 WEST 39TH STREET, NEW YORK

6 BOUVERIE STREET, LONDON, E.G.

1911

H-F'i'.

F?

Engineering
Library

COPYRIGHT, 1911, BY THE
McGRAW-HILL BOOK COMPANY

PREFACE

The subject matter of this book is substantially the text
of a series of lectures prepared under the auspices of the
Department of Mechanical Engineering of Columbia Uni-
versity, for delivery to senior students. As here presented,
it takes the form evolved from three years' experience in
the class-room at Columbia, somewhat modified from the
manner of the lecture platform, and adapted to meet the
needs of a more general study as discovered by contact with
non-technical audiences at Harvard and the New York
University, and by many inquiries addressed to the Editorial
Department of The Engineering Magazine.

The original purpose when the work was undertaken at
Columbia in 1908-09 was to lay the foundations for a com-
posite course in Works Management, in which several
eminent practitioners should follow with successive portions
of the main structure. Experiment showed, however, that
the better plan was to give these preparatory essays rather
the character of a primary triangulation, covering the whole
province, though it might be only in very broad outline.
Further detail might then be filled in sectionally, as ex-
pedient, by specialists, each in his own subject. Thus, the
discussion now reduced to printed chapters, was to be co-
ordinated with certain lectures by Charles U. Carpenter, on
factory and commercial organization; by Harrington Emer-
son, on the philosophy of efficiency; by H. L. Gantt, on
scientific management; by R. T. Lingley, on factory ac-
counting. It has not seemed feasible to co-ordinate these
other lectures here so that the volume might present the en-
tire argument. Several of the collaborators have published

254498

VI PREFACE

independently even fuller expositions of their thought on the
special topics, and reference to these will be found through-
out the book.

This volume is therefore put forth to serve in a wider
sphere the same function it served in the Columbia course —
that of affording a carefully chosen standpoint from which
to view the principal factors in the industrial problem, their
relations and influence, and the properties and efficacies of
the more important solutions so far proposed.

The scale, as already said, is broad. The study is
directed almost wholly to the discovery and definition of
ideals and principles, or in some cases of institutions ; very
little attempt is made at the description of methods and de-
vices. The book advances no claim of exhaustiveness, but
only of an earnest effort to maintain a just scale of propor-
tion, and to trace an outline of the province it undertakes
to delimit, by which the student of industrial engineering
may safely orient himself in his further and closer examina-
tion of the subject.

C. B. G.

May, 1911.

CONTENTS

CHAPTER I

PAGE

THE ORIGIN OF THE INDUSTRIAL SYSTEM.

Industrial Engineering Defined — Its Composite Character —
Its Two Phases, Analytical and Synthetic — Industrial En-
gineering Deals with Machinery, Materials, Methods, Man-
agement, Men, Markets — It is Concerned with the
Equivalency between Expenditure and Return — Two
Compelling Forces toward Cost Reduction, Competition
and Efficiency Effort — Industrial Progress Dependent on
Three Factors, Technical, Commercial, and Psychical —
These Factors Demonstrated by the Rise of the Industrial
System . i

CHAPTER II

REFLEX INFLUENCES OF THE INDUSTRIAL SYSTEM.

Replacement of Hand Labor by Machinery and Power — Re-
sultant Increase in the Size of the Industrial Unit — This
Aggregation Involved Specialization and Standardization —
Industrial and Sociological Consequences of Aggregation —
The Trust and the Union Inevitable — Hope for Their
Betterment — Specialization and Its Tendencies — Stand-
ardization and Its Effects — The Threatening Evils of
Overstandardization — Labor . Relations as Affected by
These Three Great Influences — Dangers and Their Prom-
ising Remedies — The Major Difficulties of the Manufac-
turing Problem — The Approach to Their Solution
Through Organization 19

CHAPTER III

PRINCIPLES OF INDUSTRIAL ORGANIZATION.

Problems of Manufacturing Studied by a Concrete Example
— The Necessity for Organization Shown — What Organ-
ization Is — Two Great Organization Principles, Line and
Staff — Line and Staff Defined and Illustrated — Indus-

vii

viil CONTENTS

PAGE

trial Organizations Usually Weak in Staff Co-operation —
The Defects of All-Line Organization Pointed Out —
Scientific Management Provides a Proper Co-ordination of
Line and Staff — The Two Great Schools of Scientific
Management Typified by F. W. Taylor and Harrington
Emerson — A Summary of Their Doctrines — An Analysis
of Ordinary Industrial Organization — How the Control
of Various Factors of Production is Usually Systematized —
The Conventional Methods of Handling Management, Ma-
terials, Machinery, Men, Methods, Money 39

CHAPTER IV

FORMS OF INDUSTRIAL OWNERSHIP.

The Legal Status, Powers, Responsibilities, and Limitations of
the Several Types — Individual Ownership — The Part-
nership or Firm — The Joint-Stock Association — The Cor-
poration— Corporate Capitalization and Liability — Cor-
poration Management — The Organization of a Production
Department — How the Manufacturing Order Originates
— Production Orders, Job Tickets, Material Tickets —
The Cycle of Movement from Raw Stores to Finished
Stock — The Stores Department and Stores-Keeping — The
Selling Department . . . .,.'.. . . . 59

CHAPTER V

THE NATURE OF EXPENSE.

The Cycle of Manufacture Reviewed — The Elements of
Cost — Productive and Non-productive Outlay — The
Manufacturing Proposition in Terms of Labor, Materials
and Expense — Expense from the Accountant's Point of
View — The Problem of Distribution — What Expense
Distribution Is — Why Correct Distribution is Impor-
tant— Why It Is Difficult — Shop Expense and General
Expense — How Expense Accrues — Practical Examples —
Constant and Variable Expense — The Variation of Ex-
pense Ratio with Changing Volume of Business ... 79

CHAPTER VI

DISTRIBUTION OF EXPENSE.

The Underlying Idea of Expense Distribution — Use of Visi-
ble Elements Such as Machinery, Labor, or Time, for Pro-
rating the Invisible Element of Expense — The Five Car-

CONTENTS IX

PAGE

dinal Methods of Shop-Expense Distribution — Distribution
by Material and Its Limitations — The Percentage-on-
Wages Method — Its Wide Applications and Its Defects —
The Man-Hour Plan and Its Distinctive Characteristics —
The Machine-Hour Method ; How It is Put into Effect —
The Supplementary Rate — The Problem of the Penalized
Job — Expense Distribution by Production Factors — Dis-
tribution of General Expense — Depreciation — Its Nature
and Treatment — Expense Distribution Necessary to Cost
Finding — Its Usefulness in Cost Reduction .... 97

CHAPTER VII

LABOR. THE PRIMARY WAGE SYSTEMS.

Labor as an Element in Manufacturing Costs — Its Function
in Multiplying or Dividing Other Costs — Reasons for
Stimulating Production by High Wages — The Unfavor-
able Results of Collective Bargaining — Individual Effi-
ciency Reward as a Countercheck — The Two Fundamental
Methods of Wage Payment; Day Pay and Piece Rates —
All Other Systems are Combinations of These Two — The
Day- Wage System; Its Disadvantages — The Piece-Rate
System; Its Promise and Why the Promise is Not Realized
— Injurious Results of Unscientific Rate Setting — The
Inherent Fault of Principle in Piece-Rate Payment — The
Contract Plan of Paying Labor — The Halsey Premium
System and Its Practical Use — Its Advantages and Disad-
vantages— The Rowan Premium Plan 113

CHAPTER VIII

LABOR. PHILOSOPHIES OF MANAGEMENT.

Philosophies of Management — Wage Methods Only One
Feature in Management Policy — The Taylor Differential
Piece-Rate — The Elements of Its Underlying Theory —
Its Use in Practice — The Gantt Bonus Method ; An Evo-
lution from the Differential Piece-Rate — Its Organic Dif-
ferences from the Differential Piece-Rate — Contrast be-
tween the Philosophies of Gantt and Halsey — The Emer-
son Efficiency or Individual-Effort System — Its Peculiar
Features — How Efficiency is Calculated — Apportionment
of Bonus According to Efficiency — Gilbreth's Theory of
Motion Study — The Gilbreth Wage Methods — Carpen-
ter's Policies of Labor Management — Profit-Sharing —
Co-operative Stockholding — Welfare Work . . . .133

X CONTENTS

PAGE

CHAPTER IX
MATERIALS.

Material Represents the Crystallized Labor of Preceding
Operations — Illustrations from Familiar Cases — The
Varying Ratio of Material to Labor and Expense — Ma-
terial as a Physical Nucleus of Industrial Values — It is
More Potential for Good or Harm Than the Money It
Represents — Ordinary Industrial Practice is Harmfully
Careless of Material — The Purchasing Department — The
Ordinary Routine of Storeskeeping — Duties of the Stores
Department — Standardized Listing of Stock — Systematic
Arrangement of Stock — Stock Records — Maximum and
Minimum Limits — The Influence of Materials on Manu-
facturing-Plant Design 155

THE ORIGIN OF THE INDUSTRIAL SYSTEM

PRINCIPLES OF INDUSTRIAL
ENGINEERING

CHAPTER I
THE ORIGIN OF THE INDUSTRIAL SYSTEM

INDUSTRIAL engineering is the formulated science of
management. It directs the efficient conduct of manufac-
turing, construction, transportation, or even commercial en-
terprises — of any undertaking, indeed, in which human labor
is directed to accomplishing any kind of work. It is of very
recent origin. Indeed, it is only just emerging from the
formative period — has only just crystallized, so to speak,
from the solution in which its elements have been combin-
ing during the past one or two decades. The conditions
that have brought into being this new applied science, this
new branch of engineering, grew out of the rise and enor-
mous expansion of the manufacturing system. This phe-
nomenon of the evolution of a new applied science is like
those that have been witnessed in other fields of human
effort when some great change, internal or external, forced
them from a position of very minor importance into that of
a major service to civilization. Columbus could blow
across the ocean in a caravel to an unknown landfall; but
before a regular packet service could be run between New
York and Liverpool navigation must be made a science. It
has drawn upon older, purer sciences for its fundamental
data — upon astronomy, meteorology and hydrography, and
later upon marine steam engineering and electricity; but out

i

2 PRINCIPLES OF INDUSTRIAL ENGINEERING

of all these it has fused a distinct body of science of its own,
by which new practitioners can be trained, by which cer-
tainty, safety and efficiency of performance may be sub-
stantially assured.

Navigation is not merely making correct observation of
the sun and stars, of lights and beacons, of log and lead;
it is not merely directing the propelling and steering ma-
chinery; it is not merely knowledge of courses and dis-
tances; it is not merely storm strategy. It is the co-ordina-
tion of all these in handling the equipment provided by the
marine engineer and naval architect, through the work of a
crew of men.

In somewhat like manner, industrial engineering 1 has
drawn upon mechanical engineering, upon economics, soci-
ology, psychology, philosophy, accountancy, to fuse from
these older sciences a distinct body of science of its own. It
does not consist merely in the financial or commercial direc-
tion, nor merely in running the power-plant or machinery,
nor merely in devising processes or methods. It consists in/
co-ordinating all these things, and others, in the direction of
the work of operatives, using the equipment provided by
the engineer, machinery builder, and architect.

The cycle of operations which the industrial engineer di-
rects is this: Money is converted into raw materials and
labor; raw materials and labor are converted into finished
product or services of some kind; finished product, or serv-
ice, is converted back into money. The difference between
the first money and the last money is (in a very broad sense)
the gross profit of the operation. Part of this is absorbed
in the intervening conversions, or, in other words, in the
operations of purchase, manufacture, sale, and the adminis-
tration connected with each.

1 A systematic presentation of the field of industrial engineering from
an entirely different point of view and by a very different method will
be found in " Factory Organization and Administration," by Prof. Hugo
Diemer; McGraw-Hill Book Co.

THE INDUSTRIAL SYSTEM 3

Now the starting level (that is, the cost of raw materials
and labor) and the final level (the price obtainable for fin-
ished product) — these two levels are generally fixed by com-
petition and market conditions, as surely and as definitely as
the differences in level between intake and tail race are
fixed in a water power. Hence our profit, like the energy
delivered at the bus bars, varies not only with the volume
passing from level to level, but with the efficiency of the
conversions between these levels. In the hydroelectric
power-plant, the conversion losses are hydraulic, mechanical
and electrical. In any industrial enterprise the conversion
losses are commercial, manufacturing, administrative. It is
with the efficiency of these latter conversions that industrial
engineering is concerned.

The industrial engineer may have in his organization staff
many mechanical engineers superintending special depart-
ments — design or construction, or the power-plant, for in-
stance — while his own duty is to co-ordinate all these factors,
and many more, for the one great, central purpose of effi-
cient and economical production. He is concerned not only
with the direction of the great sources of power in nature,
but with the direction of these forces as exerted by ma-
chinery, working upon materials, and operated by men. It
is the inclusion of the economic and the human elements es-
pecially that differentiates industrial engineering from the
older established branches of the profession. To put it in
another way : The work of the industrial engineer not only
covers technical counsel and superintendence of the technical
elements of large enterprises, but extends also over the man-
agement of men and the definition and direction of policies
in fields that the financial or commercial man has always
considered exclusively his own.

In general, the work of the industrial engineer, or, to use
a yet more inclusive term which is coming into general use,
the efficiency engineer, has two phases. The first of these

4 PRINCIPLES OF INDUSTRIAL ENGINEERING

is analytical — we might almost call it passive to distinguish ^
it from the second phase, which is synthetic, creative, and
most emphatically active. The analytical phase of indus-
trial or efficiency engineering deals merely with the things
that already exist. It examines into facts and conditions,
dissects them, analyzes them, weighs them, and shows them
in a form that increases our useful working knowledge of
the industry with which we have to deal. To this province
of industrial engineering belong the collection and tabula-
tion of statistics about a business, the accurate determination
and analysis of costs, and the comparison of these costs with
established standards so as to determine whether or not they
are normal. To this sort of work Harrington Emerson ap-
plies the term " assays,'.' speaking of labor assays, expense
assays, etc., and maintaining (with good reason) that the
expert efficiency engineer can make determinations of this
sort as accurately, and compare them with standards as in-
telligently, as an assayer can separate and weigh the metal
in an ore. To this province belong also such matters as
systematic inquiry into the means and methods used for re-
ceiving, handling, and issuing materials, routing and trans-
porting these materials in process of manufacture, the gen-
eral arrangement of the plant, and the effect of this
arrangement upon economy of operation. To this province
belongs, also, the reduction of these data and other data to
graphic form, by which their influence and bearing upon
total result are often made surprisingly and effectively man-
ifest. It is wonderful how much new knowledge a man
may gain about even a business with which he thinks he is
thoroughly familiar by plotting various sorts of data on
charts where, say, the movement of materials back and
forth, or the rise of costs under certain conditions, are trans-
lated immediately into visible lines instead of being put into
the indirect and rather unimpressive form of long descrip-
tions or tabular columns of figures.

THE INDUSTRIAL SYSTEM 5

The great purpose and value, indeed, of these analytical
functions of industrial engineering is that they visualize the
operations of the business and enable us to pick out the weak
spots and the bad spots so that we can apply the right rem-
edies and apply them where they are needed. They make
us apprehend the presence and the relative importance of
elements which would otherwise remain lost in the mass, un-
detected by our unaided senses.

The second phase of industrial engineering — the active,
creative and synthetic phase, — goes on from this point and
effects improvements, devises new methods and processes,
introduces economies, develops new ideas. Instead of
merely telling us what we have been doing or what we ar
doing, it makes us do the same thing more economically or
shows us how to do a new thing that is better than the old.
To this part of works management belongs, for example,
the rearrangement of manufacturing plants, of depart-
ments, or of operations so as to simplify the process of man-
ufacture; the correction of inefficiencies, whether of power,
transmission, equipment or labor; the invention and appli-
cation of new policies in management which make the ideals
and purposes of the head operate more directly upon the
conduct of the hands ; the devising of new wage systems by
which, for example, stimulus of individual reward propor-
tioned to output makes the individual employee more pro-
ductive.

The exercise of these functions, whether analytical or
creative, by the industrial engineer or the efficiency engineer,
requires that he shall have technical knowledge and scien-
tific training, but in somewhat different form from the equip-
ment of the mechanical engineer and somewhat differently
exercised.

Industrial engineering deals with machinery; but not so
much with its design, construction, or abstract economy,
which are strictly mechanical considerations, as with selec-

6 PRINCIPLES OF INDUSTRIAL ENGINEERING

tion, arrangement, installation, operation and maintenance,
and the influence which each of these points or all of them
together may exert upon the total cost of the product which
that machinery turns out.

It deals with materials, but not so much with their me-
chanical and physical constants, which are strictly technical
considerations, as with their proper selection, their standard-
ization, their custody, transportation, and manipulation.

It deals very largely with methods; but the methods with
which it is particularly concerned are methods of performing
work; methods of securing high efficiency in the output of
machinery and of men; methods of handling materials, and
establishing the exact connection between each unit handled
and the cost of handling; methods of keeping track of work
in progress and visualizing the result so that the manager
of the works may have a controlling view of everything that
is going on ; methods of recording times and costs so that
the efficiency of the performance may be compared with
known standards; methods of detecting causes of low effi-
ciency or poor economy and applying the necessary remedies.

It deals with management — that is, with the executive
and administrative direction of the whole dynamic organ-
ization, including machinery, equipment and men.

It deals with men themselves and with the influences which
stimulate their ambition, enlist their co-operation and insure
their most effective work.

It deals with markets, with the economic principles or
laws affecting them and the mode of creating, enlarging, or
controlling them.

The most important elements of industrial engineering
are summed up in this alliterative list — machinery, mate-
rials, methods, management, men and markets. And these
six elements are interpreted and construed by the aid of an-
other factor whose name also begins with m — Money.
Money supplies the gauge and the limit by which the other

THE INDUSTRIAL SYSTEM 7

factors are all measured and adjusted. This of course is true
not alone of industrial engineering; the civil engineer, the me-
chanical engineer, the electrical engineer, the mining en-
gineer, each and all must normally be expected to make
money for his employer or client. One of the simplest prin-
ciples of the profession, but one which the mere technician
sometimes finds it hardest to keep in mind, is that the pri-
mary purpose for which the engineer is usually engaged is
to direct the employment of capital so that it may pay back
dividends to its owners. And while this is generally true
of all engineering employment, it is most particularly, con-
tinuously and everlastingly true of works management. It
is much easier to conceive of the civil engineer or the me-
chanical engineer being retained to carry out some piece of
work in which scientific accuracy is demanded regardless of
cost, than it is to conceive of a shop superintendent being
directed or even permitted to manufacture a line of product
regardless of cost.

It is the ever-present duty of the industrial engineer, of
the efficiency engineer, to study constantly, and to study con-
stantly harder and harder, the question of equivalency be-,
tween the dollars spent and the things secured. It is not
sufficient, for example, for him to know that a machine sold
for $100 costs $75 to make. This may be a very good
profit and the machine itself may be an excellent one.
There may be vouchers honestly connecting every cent of
the $75 cost with some actual item of material, labor, or
expense. Nevertheless, the industrial engineer must con-
stantly look back of these figures to see whether by some
change of machinery, some modification of materials, some
alteration of methods, some higher skill in management,
some stimulus to the men, he can make the machine cost less
than $75 for its manufacture, or can make it a better ma-
chine for the same cost, or perhaps can do both.

In short, the industrial engineer is under unending and

8 PRINCIPLES OF INDUSTRIAL ENGINEERING

unremitting pressure to secure a true proporti.on between
what he spends and what he gets. And the proportion is
never true so long as the smallest opportunity remains for
getting more in return for what he spends, or for spending
less in payment for what he gets. The function of the in-
dustrial engineer is to determine with the utmost possible
wisdom and insight whether and where any disproportion
between expenditure and return exists, to find the amount of
the disproportion, the causes of such disproportion, and to
apply effective remedies.

The forces, causing this pressure for the reduction of cost
are principally two. The older and cruder is competition.
The later and larger, which in itself carries the answer to
competition, is the effort toward efficiency.

Competition was not created by the manufacturing sys-
tem. It existed from the foundation of the world. But
it took on a new meaning and new activity when the things
began to be made first and sold after (as they are under the
manufacturing system) instead of being sold first and made
afterward, as they were under the older order. If you con-
tract to buy something which is not yet in existence — a
bridge, a house, a suit of clothes, or what not — the bar-
gain is largely a matter of estimate, often, indeed, a matter
of guess work, on both sides. You have to strike a mental bal-
ance between the several alternatives presented and compare
in your mind net results of cost, design, quality, certainty and
promptness of delivery, personality, credit, and perhaps
many other things, some of them intangible, and some only
to be proved by the outcome. The proposition that seems
most attractive is closed; the competing ones are never car-
ried out at all. The buyer never can tell with absolute cer-
tainty whether or not he got the best value for his money;
he can only compare the thing which has been made with what
he thinks the other things would have been if they had been
made. The seller does not know until everything is over

THE INDUSTRIAL SYSTEM 9

whether or not he made a profit, or how much. But when
you sell things already made, like lathes or high-speed en-
gines or dynamos, off the sales-room floor, the prospective
buyer can make the most absolute and intimate comparison
between the things and their prices. He can compare
Brown & Sharpe with Lodge & Shipley, Harrisburg with
the Ball engine, Westinghouse with Crocker-Wheeler. He
can compare accurately design, quality, cost before a word or
a dollar passes. The necessity for offering the best goods
for the least money and yet making a fair* profit becomes
vital and insistent, and so the knowledge of actual costs and
the ability to reduce costs become fundamental. Competi-
tion has therefore been in one way a tremendous force for
economy in manufacturing. And yet, by a paradox, in an-
other way competition has been one of the great sources of
waste, by causing duplication of plant, of organization, of
equipment, of sales effort, and of middle-men — none of
which may have any better reason for existence than some-
one's desire to share in tempting-looking profits, but all of
which must be paid by the consumer — all of which become
a burden on society at large1.

The new and ethically fine ideal, therefore, is efficiency
— the reduction of costs and the elimination of waste for
the primary purpose of doing the thing as well as it can
be done, and the distribution of the increased profits thus
secured among producer, consumer, and employee. Effi-
ciency is a concept as much finer than competition as crea-
tion, conservation, is finer than warfare. It is a philos-
ophy — an interpretation of the relations of things that may
be applied not only to industry but to all life. Let me quote
a few sentences from Harrington Emerson's " Efficiency as
a Basis for Operation and Wages " :

" If we could eliminate all the wastes due to evil, all men
would be good; if we could eliminate all the wastes due to
ignorance, all men would have the benefit of supreme wis-

IO PRINCIPLES OF INDUSTRIAL ENGINEERING

dom; if we could eliminate all the wastes due to laziness and
misdirected efforts, all men would be reasonably and health-
fully industrious. It is not impossible that through efficiency
standards, with efficiency rewards and penalties, we could
in the course of a few generations crowd off the sphere the
inefficient and develop the efficient, thus producing a nation
of men good, wise and industrious, thus giving to God what
is His, to Caesar what is his, and to the individual what is
his. The attainable standard becomes very high, the at-
tainment itself becomes very high.

" Efficiency is to be attained not by individual striving,
but solely by establishing, from all the accumulated and
available wisdom of the world, staff-knowledge standards
for each act — by carrying staff standards into effect through
directing line organization, through rewards for individual
excellence; persuading the individual to accept staff stand-
ards, to accept line direction and control, and under this
double guidance to do his own uttermost best."

Efficiency, then, and in consequence industrial engineer-
ing, which is the prosecution of efficiency in manufacturing,
involves much more than mere technical considerations or
technical knowledge. If we consider the way in which the
manufacturing system came into existence, we can quite
easily and clearly discover its most important elements; we
shall see particularly something that it is of the utmost im-
portance for us to understand, and that is that it did not
originate in technical advances alone, and it has never de-
pended upon technical advances alone, but it has been in-
fluenced at least in equal and perhaps in larger proportion
by economic or commercial conditions, and by another set
of factors which are psychological — that is, which have to
do with the thoughts and purposes and emotions of men.

The point is very important, because true and stable in-
dustrial progress, whether for the individual, the manufac-
turing plant or corporation, or the nation at large, depends

THE INDUSTRIAL SYSTEM I I

upon a wise co-ordination and balance between technical,
commercial, and human considerations. It is frequently
necessary in addressing a commercial audience to empha-
size the importance of the technical element. Before a
technical audience, on the other hand, emphasis must often
be laid on the commercial and psychological factors that in
practical achievement must always be interwoven with the
technical factor. Every great industrial organization and
every great step in industrial progress to-day includes all
three elements, but they will perhaps appear more distinct
if we look at the origin and source of the manufacturing sys-
tem, out of which this new science of industry has sprung.
The origin of the manufacturing system was clearly enough
the introduction of a group of inventions that came in close
sequence about the end of the eighteenth century and be-
ginning of the nineteenth. These were the steam engine,
mechanical spinning and weaving machinery, the steamboat,
the locomotive, and the machine-tool. It is commonly as-
sumed that the great cause of the entire movement was
Watt's improvement of the steam engine — that the indus-
trial era which began a little more than a century ago was,
so to speak, waiting in suspense, in the hush of things un-
born, ready to leap into being as soon as the prime mover
had been perfected to a point of practical service.

This view seems to be incomplete. The steam engine
had been discovered, forgotten, and rediscovered, it would
be difficult to say how often, from the time of Hero or
earlier down to the time of Watt — forgotten and ignored
because the world had no use for it ; the economic conditions
were not ripe for it. If there had been the same demand
for power to pump the mines in England, the same demand
for machinery in the textile industries of England, the same
need for better vehicles to transport commercial products by
land and by sea, in the time of Papin or the Marquis of
Worcester that there was in the time of Watt, I think it is

12 PRINCIPLES OF INDUSTRIAL ENGINEERING

quite conceivable that the inventions which made Watt fa-
mous would have come a full century earlier, and his genius
would have been exerted upon a later stage of the problem,
as the genius of Willans and Corliss and Parsons and Curtis
has been within the period of our own lives.

I am strongly inclined to believe that the world has al-
ways had something near the quality and quantity of en-
gineering talent it has been able to use. When civilization
was dependent chiefly upon roads, aqueducts, bridges and
buildings, it got them. We have never done some of these
things better, technically speaking, than the Assyrians, or
the Romans, or the architects of the great cathedrals of the
middle ages; some, indeed, we perhaps never shall do again
as well. Newcomen, Watt, Arkwright, Stephenson, Besse-
mer, applied genius to a new sort of opportunity, rather than
embodied in themselves a new order of genius. They may
indeed have been greater than other workers who preceded
them, but the more important element in their success is that
the world was at last ready and waiting as it never had been
before for the peculiar product of genius they had to offer.
This readiness that opened the door to their success was due
to economic or commercial conditions, not merely to the
technical invention. In its larger relations, then, technical
success depends upon commercial opportunity. There must
be a potential market. Bessemer steel could not have found
any welcome in the Stone Age. The typewriter would not
have succeeded in the dark ages when no one but a few
clerics could read and write. Savages who traded cocoa-
nuts for beads and brass wire could afford no encouragement
to the manufacturer of the cash register or the adding ma-
chine. It was not because of thermodynamic inefficiency
that Hero's engine failed of adoption. On the other hand,
when the world was ready for steam power it accepted very
gladly to begin with a very crude machine, and technical im-

THE INDUSTRIAL SYSTEM 13

provement went step by step with larger practical utilization,
sometimes leading and sometimes following. There must,
then, be a potential market or application, or advance in the
applied sciences will be limited. This is an axiom to be
placed alongside of another — that there must be scientific
study and research, or industries based upon the applica-
tions of science will stagnate and remain at a low stage of
efficiency.

The second factor in industrial progress, then, is the com-
mercial factor. There must be a potential market; but it
does not follow from this that technical progress is wholly
subordinate to economic conditions. The inventor or the
engineer is not of necessity merely a follower of progress in
commerce or industry. Many of the great advances in ap-
plied science, or in branches of industrial achievement per-
haps too lowly to be called applied science, have been made
by man who foresaw not only technical possibilities but
commercial possibilities — who undertook not only to per-
fect the invention but to show the world the advantage of
using it. I think this was substantially the case with wire-
less telegraphy, with the cash register and typewriter. No-
body had demanded these things because nobody had thought
of them, and the productive act in each instance included
not only technical insight into the possibilities of doing the
thing, but human insight into the fact that people would ap-"
preciate these things and use them if they could be furnished
at or below a certain cost. Modern industrial methods have
shown us that in many cases there is no such thing as a fixed
demand beyond which supply can not be absorbed, but that
demand is a function of cost of production. There may be
no demand at all for an article costing a dollar, but an al-
most unlimited demand for the same article if it can be sold
at five cents. A large part of the work of the production
engineer lies in the creation of methods by which the cost of

14 PRINCIPLES OF INDUSTRIAL ENGINEERING

production is decreased and the volume of production is
thereby increased, with advantages to both the producer and
the consumer.

In all these cases you see that technical achievement, tech-
nical success, is closely interlocked with industrial or eco-
nomic conditions, and with the understanding and control of
industrial or economic influences and forces.

The third factor in industrial progress is the psychological
factor — the element contributed by the mental attitude,
emotions, or passions of men. I might suggest its possible
importance by reminding you that there were centuries in
which the inventor of the steam engine, far from being re-
warded, would have been burned at the stake as a magi-
cian. This would not have been because the extraordinary
character of the achievement was unrecognized, but because
its nature was misinterpreted. That particular form of ex-
pressing intellectual dissent has gone out of date. We are
much more civilized now, and nineteenth- or twentieth-cen-
tury inventors who are far ahead of their times are no longer
burned; they are merely allowed to starve to death; while
those who are timely, but not commercially shrewd, are us-
ually swindled by some promoter, who in turn is frozen out
by a trust. In any case, you see, the simple technician gets
the worst of it industrially, not because his physical science
is weak, but because his commercial and mental shrewdness
is not correspondingly developed.

Taking a larger view of it, we shall see that almost every
important advance in engineering progress is made only after
a period of pause, an interval following proof of the tech-
nical achievement, following even demonstration of its com-
mercial economy. We might call this the psychological lag
— the time necessary for the growth of human faith suf-
ficient to energize an industrial movement. In the case of
the electric railway, or the motor vehicle, for example, this
lag was measured by years. Bessemer could not convince

THE INDUSTRIAL SYSTEM 15

the ironmasters of England, and had to build his own plant.
Westinghouse, having gained after much difficulty an audi-
ence with the greatest railroad manager of that day, was
told that this practical railroad man had no time to waste
on a damn fool who expected to stop railroad trains with
wind. The matter deserves emphasis because it is almost
certain to enter into the individual experience of every man.
You will have to make someone believe you, and believe in
you, before you can get anywhere or do anything. When a
technical man has a proposition to put before an individual,
or a group of individuals, or society at large, he is very
likely to think that scientific demonstration of its technical
soundness ought to be convincing. You will find, however,
that men at large will substantially ignore scientific proof,
and that you must add to it, second, proof of the commer-
cial or economic argument, and third, that psychological
force which convinces not the reason, but the emotions. In
all industrial engineering, which involves dealing with men,
this psychological or human element is of immense, even
controlling importance. The principles of the science are
absolute, scientific, eternal. But methods, when we are
dealing with men, must recognize the personal equation
(which is psychologic) or failure will follow. The differ-
ences between the several philosophies of works management
as expressed in the wage systems which we are going to con-
sider later are psychological. Success in handling men and
women, which is one of the most important parts of the
work of the industrial engineer, is founded on knowledge
of human nature, which is psychology.

The great industrial movement, then, with which we have
to do is triune in its nature, the three chief elements being
the technical or scientific, the economic or commercial, and
the psychological or human. They seldom respond at equal
rates to the impetus of advance. Sometimes the technician
pushes so far ahead that the world loses touch with what he

1 6 PRINCIPLES OF INDUSTRIAL ENGINEERING

is doing and his work lies long unused until civilization
catches up; sometimes the commercial tendency is unduly
aggressive, and discourages or impedes real scientific achieve-
ment; very often the men most concerned with the indus-
trial activities go badly wrong in their philosophy, and get
disastrously false notions as to what makes for real progress
and real welfare. More difficulties, perhaps, come from this
cause than from any other.

To the technical man, it is an ever-present duty to keep in
view absolute ideals, to seek every chance for their advance-
ment, and to mould conditions and men so as to obtain con-
stantly nearer approach to these ideals; but in doing this he
must never forget to attach full weight to economic condi-
tions, and he must never allow himself to ignore human na-
ture.

REFLEX INFLUENCES OF THE INDUSTRIAL

SYSTEM

CHAPTER II

REFLEX INFLUENCES OF THE INDUSTRIAL SYSTEM

IN the foregoing broad sketch of the rise of the industrial
system and of the influences controlling its development,
much stress is laid on the non-mechanical factors, because
when we consider manufacturing as a province of engineer-
ing we are prone to think first, oftenest, and most of the
technical aspects. They need no added emphasis. It is ex-
pedient rather to keep deliberately in view the other com-
ponents of the new applied science of industrial manage-
ment. But having made emphatic recognition and ac-
knowledgment of the economic and psychologic factors in
the movement, we may return to pay just tribute to the power
and effect of the great discoveries and inventions that in-
augurated the manufacturing system. The distinguishing
characteristic of this system was the introduction of me-
chanical power and machinery in place of hand labor. In-
crease in complexity of industrial organization was thereby
very much accelerated, and great changes were worked from
which have followed many of the difficulties and also many
of the advantages of manufacturing conditions to-day. For
this replacement of the old handicrafts by power and ma-
chinery gave impulse to three great swiftly moving tenden-
cies: aggregation, or progressive increase in size of the
industrial unit; standardization, or the execution of work by
fixed patterns ; and specialization, or limitation of the work
of each individual to the repetition of some small element of
an entire process. Each of them has far-reaching effects, not
only in the conduct of industry, but upon the social and po-
litical order. Let us consider them separately.

19

2O PRINCIPLES OF INDUSTRIAL ENGINEERING

Aggregation is the coalescence of capital, of machinery, of
operatives, into larger and larger bodies under one central-
ized direction. Large bodies of workers had indeed been
assembled in the past for works of construction — witness
the Pyramids — but the occasion was unusual. Handi-
crafts induced distribution rather than concentration. But
when invention had given the world power-driven machines,
it became frequent, then customary, then inevitable (because
economical) to group them according to the largest number
that could be conveniently operated by some source of prime
energy — the older water-power or the newer steam-engine.
In either case the result was the assembly in one establish-
ment of a body of workers, larger or smaller, according to
the mechanical and market conditions. In fact, the power-
plant became the principal material factor determining the
size of the industrial unit.

Before the mechanical prime-mover and the power-driven
machines were put into service, in the days when the hand
or the foot of the workman furnished all the motive power
necessary, the industrial unit was the single workman. He
was motive power, transmission gearing, and often driven
machine, all in himself, and he needed no factory building
other than the house in which he lived. This was the age of
domestic industries. It exists to-day to some extent, side by
side with the large manufacturing plant and in the midst of
this factory era. Familiar examples are the Scotch weavers,
the German toy makers, Swiss watch makers, and in many
large cities a certain proportion of the garment workers.

It would seem as if these domestic industries should af-
ford the most nearly ideal conditions for the welfare of
the worker, and should offer least opportunity for the evils
of the manufacturing system. But this supposition does
not seem always to be well supported by examination of the
facts. You may remember that Barrie does not draw a
very happy picture of the condition of the Scotch weavers,

SPECIALIZATION AND STANDARDIZATION 21

and we do not have to go far to find that the lot of the
garment worker who carries on his work in his own home
is in many respects miserable. The concentration of
workers into factories, it is true, caused many evils; but the
very fact that the communities of workers were so large and
the conditions were so difficult to conceal, of itself operated
powerfully to bring about a correction of the evils. How-
ever, taking the whole range of industrial operations, and
the occupations dependent upon them, one of the first and
greatest of the changes occasioned by the new order was
this change of concentration or aggregation. It caused a
concentration of manufacturing enterprise in regions where
fuel was abundant and good. It caused aggregation of
capital to finance the larger and more extensive plants which
became necessary when costly engines and machinery be-
came part of the requisite equipment. It caused aggrega-
tion of workers in the buildings where work must be carried
on, and in the districts available for residence in the vicinity
of these works. The same principle extended its influence
into the field of transportation, which became focalized at
the great manufacturing centers and developed along cer-
tain lies connecting these.

This tendency to aggregation, be it noted, exists naturally
as the outcome of merely mechanical or physical conditions,
and even in this direction the things that set it in operation
continued to act in such a way as to cause permanence and
acceleration of the movement. Broadly speaking, the big
factory has some advantage over the little one. Its wants
are larger, its purchases greater, and hence its custom is
worth more to sellers of materials and it is likely to get its
supplies a little cheaper. Its fixed expenses for manage-
ment, superintendence, and administration generally, are
perhaps no greater absolutely than those of the small factory,
and almost certainly are less per unit of product. Its in-
fluence, prestige, and control of trade connections are likely

22 PRINCIPLES OF INDUSTRIAL ENGINEERING

to be greater. It can frequently afford to hire better talent.
It may be in position to use waste or by-products advanta-
geously,, which, in smaller quantities, can not be recovered
except at expense greater than the saving. It is often in
position, if wisely administered, to undersell its small com-
petitor, and still deliver an equal or a better product.

This is not universally and unlimitedly true. There may
be, and there often are, critical points at which the large
manufacturer is at a disadvantage compared to the small
one. But the tendency is for the big to grow bigger, and
the strong to grow stronger, at some expense to the small
and weak. This is true of the pickerel in the pond and of
the tree in the woods. Given even equal brains in the
management, it is true of the industrial corporation; and
of course it is often, if not usually, true that the big con-
cern attracts or can attract to its service the best brains in
the market. I am still speaking of what we might term
wholly physical tendencies. But here again the physical
tendency becomes closely intertwined with another tendency,
which is at last partly psychological — the tendency to as-
sociation. Whenever two or three are gathered together in
one place, with a common thought or sympathy, somebody
with the spirit of the organizer always turns up and starts
a society, or a brotherhood, or a lodge, or an order of sons
or daughters of something, and soon we have nobles and
princes, exalted and most worshipful grand masters, secrets,
grips, passwords, and a constitution, by-laws and ritual.
We find this everywhere, even when the common bond has
to be artificially created. It was absolutely inevitable
where great interests, vital to the well-being of the parties
in question, were at stake. Here we had a vast industrial
civilization growing up — legislative bodies, transportation
companies, manufacturers and employees, all taking some-
what diverse views as to what was right and proper, and
all striving more or less selfishly to gain as much and to

SPECIALIZATION AND STANDARDIZATION 23

yield as little as possible. It was absolutely inevitable that
the units in each and every one of these parties should draw
together, not only through the absorption of the lesser by
the greater, but in a co-operative effort to secure, by col-
lective bargaining, for themselves and their own interests,
the greatest advantage possible. So, as a logical outcome,
we have not only railway consolidation, but trunk-line
pools, presidents' agreements, and traffic associations among
the railways. On the part of employers, we have manu-
facturers' associations, syndicates, cartels and trusts. On
the part of workmen we have trade unions, labor organi-
zations and federations. In general, these things are in-
evitable, and they will persist. They are part of ttye
evolution of the time, and they can not be abolished by
legislation nor crushed by opposing organizations. I do
not mean for a moment that they have been or are yet
wholly beneficent — far from it. Trusts, when they be-
came great enough, have proved ruthless in crushing com-
petitors, and soulless in wringing profits from helpless
customers. Labor unions have committed crimes of violence
that shock humanity. Railroads have cared for neither
law nor gospel in their autocratic pursuit of their own way.
But these are not the healthy, but the unhealthy, phe-
nomena of growth and change — the abuses which seem to
be always incident to a changing era. They pass and dis-
appear with progress in the general mastery of understand-
ing as to what is best for society at large under the new
conditions. They are abated, not by arresting the whole
development, and perhaps not as much as is generally
thought by legislative enactment, but rather by a general
change in the temper of the world, which makes the evil
proceedings unthinkable and the position of the evil-doer
intolerable. The world has seen again and again these out-
breaks of destructive activity on the part of unscrupulous
men, who are partly quicker than others to see selfish op-

24 PRINCIPLES OF INDUSTRIAL ENGINEERING

portunities in a new condition of affairs, and partly nearer
to the beasts of prey in their lack of conscience in seizing
whatever their skill enables them to grasp and their strength
enables them to hold.

In the days when the greatest prowess the world knew
was military, it was the " man on horseback " who waded
through blood to power and fortune; but it would be in-
conceivable that we should have another Napoleon to-day.
The rise of commerce and traffic over-seas, with or without
the opportunity afforded by almost continual wars and
that very elastic institution known as " letters of marque,"
saw the development of piracy to the rank almost of a gentle-
man's occupation ; but piracy has disappeared from the earth,
or rather from the ocean. The first great era of railroad
building in this country brought with it our now notorious
generation of millionaire railroad wreckers; but I think we
all must admit that the railroad world has purged itself
pretty thoroughly of that disease, or at least that our great
lines now are generally administered with honesty and faith-
ful regard for the interests of the security holders.

It is not to be denied that the hanging of pirates and
the jailing of dishonest railroad presidents has its effect in
stimulating a change of sentiment; but the great cause, after
all, is the altered public opinion which makes the hanging
or the jailing possible. To borrow a simile from bacter-
iology, these poisons that germinate in the body politic,
and seem sometimes to be increasing to fatal proportions,
appear also to develop their own anti-toxins by which they
are finally checked and destroyed. The world no longer
lives in fear of an Alexander or a Napoleon, but its confi-
dence is not based upon abolition of the military system
which gained Napoleon his opportunity. We still have
standing armies far more powerful than those with which
Napoleon conducted his campaigns, but in general they in-
spire in the minds of the Nation feelings of comfort, security,

SPECIALIZATION AND STANDARDIZATION 25

and protection. I have a good deal of faith that the great
captains of industry will soon learn a lesson from the past
and the present which will make them as little a menace
to the country's good as the captains of war now are. I
think we shall eventually see that it is not a control of 25
per cent or 50 per cent of the output that makes a trust
good or bad, but only its fairness towards consumer and
employee, and the health and soundness of its economic
policy. I think we shall find that trust managers will in-
creasingly appreciate (as some of them do already) that
their own best interests are served when they share to the
largest consistent extent, with customers and employees, and
through them with the public, those advantages in manu-
facturing which vast organized facilities give; and I think
labor will realize (as some of its advanced leaders already
do) that its own cause will be best furthered when it aids
all sound measures and plans for increasing the efficiency of
the workman, and when it seeks to exact, not as much as
force can extort, right or wrong, but just what is reasonable
and equitable.

This may sound like a description of the millennium ; but
the curve of progress made in the last few decades tends
clearly in the direction I have tried to describe. There is
indeed yet a long way to go. But reason and common-
sense are growing more powerful year by year, and the more
enlightened common-sense becomes, the more it will see that
we must let those with whom we deal prosper, if we are to
prosper ourselves.

At all events, the great corporations and the great labor
unions are here, largely as the result of the great manu-
facturing plant. I do not pretend to speak ex cathedra,
but it seems to be as futile for a manufacturer or an as-
sociation of manufacturers to attempt to " smash the union,"
as it is for a politician or a legislature to propose to " bust
the trusts." They appear to be permanent institutions —

26 PRINCIPLES OF INDUSTRIAL ENGINEERING

or at least as permanent as most of our other economic in-
stitutions — and while of course their excesses must be
curbed and many of their purposes must be enlightened,
they are a necessary part of the age, and we must deal with
them as wisely and as thoughtfully as we can, but with
conviction that they are here to stay, and that whether we
like it or not, they must be dealt with. Aggregation is a
functional necessity, indeed an organic part, of the industrial
and manufacturing system.

Specialization, the second great tendency, is the separation
of work into elementary or fractional parts which are dis-
tributed to different operatives. The workman no longer
produces, or even reproduces, a complete article, but only
performs over and over some one of the series of operations
necessary to the production of that article. This is the
natural outgrowth of the replacement of the journeyman
or mechanic by the machine tender. Take the case of the
weaving industry as an illustration. In its primitive form,
the one workman or workwoman proceeded first to card
wool or flax or cotton, until there was enough to spin the
yarn; then he spun yarn until he had enough to make the
rug or bolt of cloth or what not he had in view; then he
threaded the warp through the harness of his loom, and
worked at the weaving until the job was finished. Probably
he was dyer and finisher, also, when necessary. You can
see this whole process carried on to-day in the log cabins
of North Carolina, the farm-houses of Nova Scotia, or
the hogans of the Navajo reservation.

But as soon as the industry is taken away from hand
workers and given to machines, the operations of carding,
spinning and weaving are split up between at least three
and probably more than three different pieces of apparatus,
which means three or more different sets of operators, each
familiar with but one special stage of the process of cloth
making. There are at least three persons doing in the

SPECIALIZATION AND STANDARDIZATION ^f]

aggregate what one did originally, each seeing but one-
third of the process completed under his hands. But the
total output will probably be much more than three times as
large, even though the power loom weaves no faster than
the hand loom or the spinning frame spins no faster than
the hand wheel. This is because the time of changing
from one sort of work to another is saved, and each operator
becomes much more rapid and efficient by the constant con-
tact with and repetition of his limited function. When-
ever enough work is assembled in one establishment to allow
this sort of segregation of functions, an economic gain is
experienced. Thus, in a manufacturing machine-shop, in-
stead of allowing the operative to perform one operation
after another until he has finished a given article, we
keep him, say upon one machine tool only — lathe, planer,
drill press or whatever it may be — with the double object
of saving, first, the time of changing from one part of the
floor to another, and, second, of cultivating a higher degree
of facility within the limited range. Next, we may go
a step further, and instead of allowing our machinist to do
all the miscellaneous work on a boring mill, for example,
we keep him busy on boring nothing but one size of cylinder.
We may even go further yet, and confine him to rough boring,
moving the pieces afterwards to another specialist, who
takes the finishing cut. If our production of standard sizes
is large enough, we may keep him continuously at work rough
boring only one size of cylinder. In certain lines of manu-
facture, for which America has become famous, this speciali-
zation has been pushed to remarkable extremes* In the
making of shoes, for example, some . operatives may spend
a life time doing nothing but sewing a single seam in the
uppers.

Standardization is the third great tendency in manufac-
turing, resulting from aggregation and going hand in hand
with specialization. It is the reduction of work to fixed

28 PRINCIPLES OF INDUSTRIAL ENGINEERING

patterns, which are more and more compiled by the oper-
ations of the machine, so that skill of creation is more and
more centred in a small force of designers and the ordinary
workman becomes more and more a mere reproducer. It
naturally follows specialization. If you give a man a single
job or one stage of a job to do over and over, the logical
and necessary thing is to give him at the same time a
pattern or standard to which every repetition of his job
shall exactly correspond. Take the case of making shoes.
The old-fashioned journeyman shoemaker takes the lines of
his customer's foot, builds up a last with patches here, and
slices off parings there, models and measures and cuts and
fits, and never makes two pairs of shoes exactly alike. The
machine-made-shoe factory classifies all human feet into
some dozen or two of stock sizes, reduces these to fixed
patterns by which the leather is cut, sub-divides the sewing
and other operations among an army of operators, each
of whom does but one thing, few of whom ever see the
finished shoe, and none of whom sees the foot that is to
wear it; and among the standard sizes turned out (every
pair of each size exactly like every other pair of that size)
somewhere between i A and 13 EE, each member of the
human race is supposed to find a shoe he or she can wear.
Standardization is reduction to type, and this reduction
to type — this making everything of any given kind exactly
like every other thing of that same kind — may be pushed
to any degree of completeness. It may go so far that it
comprehends the entire machine, as, for example, the loco-
motive, the dynamo, the typewriter, or the watch. Every
part of any one of these machines may be made so exactly
like the corresponding part of every other machine of the
same kind, that perfect interchangeability is secured. This
standard for the regular product has been set and substan-
tially attained by many American manufacturers, notably
in the lighter and finer mechanical lines such as the manu-

SPECIALIZATION AND STANDARDIZATION 29

facture of firearms, sewing machines, cash registers, and
watches. The parts going to make up any one of these
mechanisms are made separately by different workmen, none
of whom may see the complete device, or have any chance
to fit the piece he is making to the other pieces with which
it is to work. The part is turned out to standard pattern,
perhaps on automatic and semi-automatic machines, con-
trolled in its every dimension by limit gauges, and is made
repetitively in dozens, hundreds, or thousands; yet when as-
sembled with the scores or hundreds of other parts which
go to make up the complete anatomy of the finished ma-
chine, it slides into its place and performs its appointed
duty probably without needing even the touch of a file in
the hands of the fitter.

In other cases where such absolute identity of reproduc-
tion is not possible, standardization may go part way.
Perhaps one standard bed-plate may serve for several sizes
of machines or engines. Sizes of shafting, or dimensions and
tapers of bolts and other details or accessories, may often
and advantageously be simplified by the adoption of one
or a few standard types. Again, standardization may be
applied to the operations by which a certain piece of work
is performed, or the time in which it is to be done, the work-
man being provided with a schedule of instructions and be-
ing expected to follow them implicitly. The idea every-
where is to concentrate the thought and skill upon the
production of the best possible type, and then to make the
reduplication of that type a purely mechanical process.
The production of the original type, whether this original
is a machine or a method of working, involves very expen-
sive study and the employment of very expensive talent.
But the process of reduplication can generally be performed
by very cheap labor; and this labor, through the constant
repetition of a limited number of movements, often attains
an almost incredible degree of rapidity. Under the old

30 PRINCIPLES OF INDUSTRIAL ENGINEERING

methods of hand manufacture, every unit of product was
practically an original. It was built up piece by piece, al-
most wholly on the principle of " cut and fit and try again,"
and every good workman had to be a skilled artisan, to a
greater or less extent a designer, often an artist, and an
engineer. Under the modern method, the unusual and
extraordinary skill of a small body of designers is made
permanently effective in the tools and process, and the work
of the journeyman is little more than mere muscular effort.
Of course, this movement has characterized manufacturing
everywhere to a greater or less extent; but in American
practice it has been applied- through a wider range and has
been carried farther than it has abroad, not only in mechan-
ical but also in structural engineering work.

" Mass Production " is a term often used to describe the
method of wholesale manufacture resulting from speciali-
zation and standardization. It has to a great extent re-
placed the practice of building things singly to fill each
individual order, just as the shoe factory has replaced the
old-time cobbler. All sorts of things from carpet tacks up
to machine tools, dynamos, steam engines, locomotives, even
battleships, are manufactured in quantity, in standard pat-
terns and sizes, and are placed upon the general market
for . each customer to pick out the pattern and size that
meets his particular need. It is clear that in saving of
cost of manufacture and in saving of time to the buyer the
system offers great advantages, and that it also carries an
advantage in that the interchangeability of parts character-
izing standard apparatus greatly facilitates replacements and
repairs. Three important commercial advantages, there-
fore, are inherent in the system; these are quality for price,
promptness of delivery, and convenience of renewal or re-
pair.

These great tendencies — aggregation, standardization
and specialization — are all interlocked. It was only when

SPECIALIZATION AND STANDARDIZATION 3!

a large number of operatives had been collected, working
side by side on the same product, that it became possible
as well as desirable to bring this product to a fixed pattern,
so that they might all work alike. And it was only when
this had been done that the parts of the work could be
separated, that is, specialized, so that in a spectacle factory,
for example, instead of every man making complete pairs
of spectacles, one lot of men might do nothing but grind
lenses, another group might do nothing but polish them,
another group might cut them to shape, another group
grind the edges, another group make the frames, and still
another group fit the finished lenses into the finished frames.1
The men in each group, working over and over at their
limited job, can do it much faster and better than the
original all-around man did. The complete process is thus
cheapened, because each part of it has been cheapened; the
product can be sold at a lower price and thus find larger
markets; the increased demand at the lower price in turn
makes it necessary to employ more men. The manufactur-
ing organization thus proceeds to a larger growth; aggre-
gation receives a new impetus ; and so the cycle turns around
again and again upon itself with increasing speed and force.

Although the immediate effect is industrial expansion at
an increasing rate of increase, there are certain further re-
sults that are not favorable.

The first unfavorable result is the disappearance of the
generally trained all-around skilled artisan. There is little
opportunity under the present industrial system for a boy
to learn a trade as every apprentice learned his trade in
former years. Factory or shop conditions do not permit
it, and the wage inducements are against it. A machine
tender on a special job can acquire in a few months, or
even weeks, enough skill in his limited routine to earn larger

1 This is, of course, only an illustration. The making of spectacles is
specialized to an immensely greater degree than this.

32 PRINCIPLES OF INDUSTRIAL ENGINEERING

wages than the apprentice can hope to get in three years,
and the ordinary beginner does not and perhaps can not
look beyond this fact.

The second unfavorable effect is that although general
standardization (that is, standardization of such things as
weights and measures, screw threads, sizes of wire, sections
of steel rails or structural shapes) is wholly desirable,
private standardization (or standardization of each manu-
facturer's special product) leads to inflexibility and re-
sistance to desirable change and improvement. Every-
thing about the whole establishment — drawings, patterns,
special machinery, processes, operations, materials — having
once been standardized and installed for the standard
product, can be changed and adapted to a different product
only at considerable expense and trouble. It is a matter
of common complaint that our American manufacturers
very often oppose a tacit or even a stubborn resistance to
advancement; that they buy up and pigeon-hole patents for
improvements in their field; that they seek to control a
market by masterful salesmanship, by combinations to
regulate products and prices, rather than by progressive
betterments of output. It is asserted by authorities of the
highest credibility that we are losing, indeed have lost, our
mechanical supremacy, largely through over-standardization,
over-adherence to standard products — lost it to Continental
manufacturers whose less complete standardization left
them more elasticity, both of equipment and of mind, and
enabled them to follow improvement after improvement,
until in excellence of product, and especially in efficiency of
product, they have left us far behind.

It would not be right to leave unmodified the impression
that the disadvantages or the dangers just suggested are
sufficient to overbalance or perhaps even to balance the
benefits to industry and to the public which have come so
far through standardization and specialization in manu-

SPECIALIZATION AND STANDARDIZATION 33

facturing. The low cost of the product which has thus
been secured has put it within the reach of large classes
of buyers who would otherwise have been unable to pur-
chase. The volume of manufactures, many of which in
turn become the basis of other manufactures, has not only
filled the world's stores with necessities, conveniences, luxu-
ries, and tools of livelihood, but has made it possible to
provide profitable occupation for the increase of the throng-
ing nations who are filling up the once-abundant acres of the
earth. Specialization, also, has furnished well-paid posi-
tions in vast numbers for a class of ability which could not
have commanded skilled wages and which, if it were not
for this opening, would have had to be content with the
smaller pay of common labor. As against these great
economic and social advantages, the drawbacks I referred
to are perhaps small. Still, the dangers do exist, and they
may increase if they are not recognized and met. It is part
of the problem of the industrial engineer of the present and
of the future to find preventive measures against the in-
flexibility — the ossification — which threatens us when we
become over-standardized, and against the dreadful narrow-
ing of functions and the deadly monotony of occupation
which comes to us when our work is over-specialized.

We need, then, some countercheck that may be balanced
against specialization and standardization, so that we may
enjoy their economic advantages without incurring evils that
lie beyond. This countercheck it is part of the industrial
engineer's function to provide. The answer appears in the
doctrines of that first apostle of scientific management,
Frederick W. Taylor — in the gospels also according to
Harrington Emerson and H. L. Gantt, and other leaders of
advanced thought in this field. It is, in part, the exaltation
of specialization — its investment with a new dignity, with
depth in place of breadth, making fwtensiveness instead of
£#tensiveness, the goal of desirability; and with this, the

34 PRINCIPLES OF INDUSTRIAL ENGINEERING

recognition of a standard as something which itself must
continually advance — as something which is a living evo-
lution and not a rigid crystallization.

But we must not follow this thought further, as we have
to consider another condition springing from aggregation
as well as from specialization and standardization, and in-
volving that most intensely interesting and important of all
the problems of industrial engineering — the relation be-
tween employer and workman. This is the exchange of
the workman's independent individuality for membership in
a class. Under the old order the village blacksmith was
a character, a landmark, a figure in local history and a
theme in literature. Under the new order, the counter-
part of this iron worker in a modern smithshop probably
tends a forge press or works as one of the gang, and passes
unnoticed to and from his work and into and out of his
employer's service, filling a job designated by a number,
and perhaps not even known by his own name.

And now we come to a very important point. When a
plant employs thousands, and even a department employs
hundreds, it is only by infrequent and improbable chance
that a superintendent or manager can observe any individual
difference among his many employees. Very rarely is any
attempt made even to keep records by which individual per-
formance can be studied and compared, if the supervising
official should be anxious to make such comparison. The
man of superior efficiency, even though he may do two
or three times as well as the inferior workman beside him,
has little chance of recognition and practically no chance
of reward proportioned to his worth. His position is fixed,
his wage is fixed, by his class and occupation. As Mr.
Gantt has pointed out, it is inevitable that under such con-
ditions the exertions of the more energetic man should be
turned to the attempt to raise the class rate. It is inevitable
that the efficient man should say: " I can't make any more

SPECIALIZATION AND STANDARDIZATION 35

money by laying more brick a day than Smith or Brown or
Jones; but if I get Smith and Brown and Jones and all the
boys to join in a demand for higher wages for bricklayers,
we can get them."

A direct result of the submergence of the individual in a
class is the elevation of the class into the attitude of an
individual in its demand for recognition. But the class
demands larger pay, not as the equivalent of larger work,
but as a tribute to larger power. As a rule, the amount of
work done by each man tends downward to the level of the
least efficient; while the wages secured by the class through
collective bargaining tend upward toward the maximum that
can be grasped and held by the power of the union. This
is immensely unsatisfactory to the employer, but it is the
logical consequence of conditions that the employer — not
the employee — has created.

One more great difficulty confronting the industrial
engineer in the administration of the manufacturing sys-
tem is the material counterpart of this impersonalizing of
the man. It is the disindividualizing of the work, or, to
use the more familiar language of the shop, of the job.
As the practice of specialization already referred to divides
all operations among different workmen and departments,
the manufacture of any single thing, whether this thing
is a locomotive or a watch or a bridge or a ton of copper
or a pair of shoes or a train mile, starts in many different
places by the apparently independent acts of many different
men. Further, each of these separate acts, which is going
to be co-ordinated with other acts so as to produce some
completed article, each of these separate acts is not a sole
individual act, but is one of a series of repeated identical
acts performed by the workmen. I hope I make this point
clear. Each unit of product is built up out of manifold
dements gathered from the work of many men. The work
of each man is divided and subdivided among many units

36 PRINCIPLES OF INDUSTRIAL ENGINEERING

of product. The lines of movement between the many
workmen on the one hand, and the many units of product
on the other hand, are an enormously complex interlace-
ment. The industrial engineer must control the orderly
guidance of this interlacement; he must see not only that the
elementary producers do their work and do it efficiently,
but that the elements thus produced are kept in the right
balance and proportion and are combined to form the right
product at the right place and at the right time. In every
direction, then, the spaces, forces, institutions of industry
have far outgrown the limits of the man. It seems as
though the world of manufacturing were no longer one of
persons, but of classes, departments, systems. And yet, in
all human affairs the originating and guiding power is the
individual brain. Nothing can take its place. However
complex the order, it must rest upon a systematic support
of human intelligences and wills. And the method of co-
ordination by which many minds and hands carry on one
of the vast industrial enterprises of the day is organization.
Its fundamental principles and methods will be taken up
in the following chapter.

PRINCIPLES OF INDUSTRIAL ORGANIZATION

CHAPTER III
PRINCIPLES OF INDUSTRIAL ORGANIZATION

WE have seen so far that the introduction of power and
machinery first inaugurated the manufacturing era,
and next gave rise to certain tendencies and policies in manu-
facturing. The most important of these were growth in
size of the manufacturing plant, and development of manu-
facture on a wholesale scale; and in connection with this
the re-apportionment of duties among the artisans employed,
so that it has become general for each to do only some
limited special part of the whole process of manufacture,
and to do this by repetitive reproduction of a fixed pattern.
While this has vastly reduced costs of production and
facilitated manufacture per se, it is evident that from the
works-management point of view it introduces very serious
problems. One is merely quantitative; the great size of a
modern factory makes it impossible for the manager to
oversee it all in person. Another is the division of opera-
tions among different workmen or departments. Each
single thing manufactured starts, or may start, in as many
different places as it has parts, each part again being not
an individual but one of a lot of like parts; and such a
lot of identical parts, though they start off together through
the shop, may- later on be divided and sub-divided and di-
verge to various finished products if they happen to be
standard to more than one pattern. The workman actually
engaged on the job has no idea of the destination of his
work and no responsibility beyond finishing his own indi-
vidual job to the standard pattern and quality, and perhaps
within some standard time.

39

40 PRINCIPLES OF INDUSTRIAL ENGINEERING

Take a pocket knife for illustration. It has a blade of a
certain size and shape, which probably is used not only in
the one pattern of knife we happen to be considering, but
also in some two-bladed and some four-bladed knives made
by the same factory. It has certain German silver pieces,
probably drop-forged, possibly not made by the knife manu-
facturer at all, but bought in quantity from some other
maker. It has some bone or pearl pieces, still more prob-
ably purchased from an outside manufacturer and used in
a number of different styles of knife, sold at various prices.
It has certain steel springs, and thin brass plates, and a
number of rivets. All these parts in hundreds and thou-
sands are passing through the factory, and being assembled
into knives just like the one we happen to take as an ex-
ample, andJnto other knives of more or less varying design,
in a continuous stream year in and year out. Each indi-
vidual workman, as, for example, the man grinding the
blade, sees no more than his own job. But if the factory
is to succeed, John Smith's order for one dozen knives like
the one we have, to be shipped to Topeka, Kansas, must go
forward at a specified time, and must be billed to him at
a price that pays a fair profit, and still is low enough to
meet competition from other knife factories.

The manufacture of a knife is a comparatively simple in-
stance. In the case of some mechanical products such as
typewriters and automobiles, for example, there are hun-
dreds and thousands of separate pieces to be routed through
the factory, worked upon, and finally assembled into a unit
of product. The paths of the several parts are something
like the paths of letters in the mail; a myriad of units from
scattered sources are gathered into larger streams, travel
together so long as their paths can be economically united,
and then diverge again in new groupings to various indi-
vidual destinations. It is utterly impossible for any one
person to follow each transaction, and yet a positive and

PRINCIPLES OF INDUSTRIAL ORGANIZATION 4!

sure result must be secured. And this is the function of
organization. System must do what the individual can not
accomplish.

It looks like an impossibly intricate problem; and yet if
we look again at the illustration used just above — the Post-
Office — we see that a fixed organization and fixed systems
of collection, transportation, and distribution produce a re-
sult in exact accordance with our plan and desire, and with
almost infinite variety and elasticity in meeting that plan
and desire. This is an illustration only — not a close par-
allel; for in manufacturing we have the added condition
that each item handled is or may be worked upon and
changed during its movement through the factory, and
in all industry all operations and processes must be con-
ducted with strict regard to economy and efficiency. We
have not an unlimited Government appropriation behind
us, and we have the neighbor across the way competing with
us and by close bidding forcing prices down so that we
have to consider even small fractions of a cent. Still, the
illustration helps us to see what organization and system do
accomplish.

Organization is fundamentally a practical plan for sub-
dividing the conduct of any undertaking into parts, each
small enough to be handled by an individual, by a method
that enables all to work together. The efficiency of organi-
zation depends on the wisdom and skill with which this di-
vision is made — the success secured not only in selecting
efficient individuals, but in arranging that each may work
at his best efficiency, and all work may keep balance and
harmony in achieving the desired result.

There are two great principles in organization commonly
known as line and staff, or, to use the terms preferred by
some industrial engineers, " military " 1 and " functional."

1 The use of the term " military " in this sense is misleading. Military
organization has long comprehended both line and staff. Indeed, as the

42 PRINCIPLES OF INDUSTRIAL ENGINEERING

Line organization is essentially simple, mathematical
subdivision. An army under a major-general is divided into
brigades under brigadier-generals; each brigade is divided
into regiments, under their colonels, and each regiment into
battalions under lieutenant-colonels or majors; each bat-
talion is divided into companies under captains; each com-
pany is again subdivided under its lieutenants, and so on
down to the corporal with his squad. Promotion is step
by step upward; the private may hope to be made a corporal,
a sergeant, a lieutenant, a captain, a major, a colonel, a
general. The lines of authority and responsibility run con-
tinuously through the whole body from top to bottom, as
the veins of the leaf gather to the stalk, and many leaf-
stalks to the twig, and many twigs to the branch, and many
branches to the trunk; and veins and stalk and twig and
branch and trunk have practically similar duties to perform
in the life and growth of the tree.

Staff organization is a division according to functions —
division by which one military department does all the
engineering work for the whole army, another supplies all
clothing, or rations, etc. It is the division by which the
roots absorb moisture and salts from the earth, the leaf
cells make chlorophyll, the sap carries the products of these
laboratories to the cell-building processes of the tree. Staff
functions are co-ordinate and co-operative, but they do not
stand to one another in any order of ascending and descend-
ing scale. The captain, simply as captain, ranks and com-
mands the lieutenant; that is a line relation. But the en-
gineer, as engineer, does not command the quarter-master;
the quarter-master does not rank and command the surgeon;
the leaf does not rank the root; that is a staff relation.
On the other hand, the captain is primarily responsible only

oldest of the " noble professions," the military long since discovered and
applied many of the principles lately reannounced by investigators of
" scientific management."

PRINCIPLES OF INDUSTRIAL ORGANIZATION 43

for his own company; each branch of the tree supports only
its own twigs and each twig its own leaves. That, again,
is line organization. The scope of the individual is limited
in area, but unlimited in responsibility within that area.
But the engineer builds a bridge for the entire army —
general, colonels, captains, and privates; each root and leaf
contributes its share to the life of the entire tree. That is
staff organization. The responsibility of the individual is
unlimited in area, but limited to one function throughout
that area.

The functions of staff and line are, therefore, not an-
tagonistic; they are not alternative and rival systems of
organization, between which we may choose and say we
will adopt this or that and refuse the other. Line organi-
zation is. essential to discipline and essential to the con-
tinuous existence of the whole body. If the general re-
tires there must be a colonel to succeed him; if the captain
is killed in action, the lieutenant must take command of the
company, or the men are scattered and lost. Staff organi-
zation is essential to efficiency, each branch of it in its own
particular function. If the commissary fails and there is
no food for the troops, the engineer can not make up for the
deficiency by vigorously building bridges. Each staff must
have a line organization within itself for discipline and
continuity; but every complete organization must embody
the principles of both line and staff if we are to secure the
best results, the staff supplying expert functional guidance,
applied through the line's direct control.

In manufacturing and industrial operations generally there
is no lack of development of line organization, but there
is too often a very meagre appreciation of the valuable re-
sults attainable by far-reaching applications of the staff
principle. This is generally characteristic of modern in-
dustrial concerns, and it is here that we are likely to dis-
cover weakness when the attainment of high efficiency is

44 PRINCIPLES OF INDUSTRIAL ENGINEERING

desired. Under line organization, the foreman is supposed
to decide every question for the men under his particular
control — employment or discharge, wages, jobs, diffi-
culties with materials, difficulties with tools, difficulties with
processes, difficulties with other employees. If the ques-
tion is too big for the foreman he goes to the superintendent,
and if it is too much for the superintendent he puts it to the
general manager, and it may finally go to the board of
directors. The assumption under-lying is akin to the sup-
position that the corporal must be a better shot than the
private, and the sergeant than the corporal, and the lieuten-
ant than the sergeant, and so on up to the general in com-
mand. It is one of the very strong features of what has
lately been called " scientific management," that in its study
of operations, its preparation of instructions, and its formu-
lation of schedules, it introduces staff co-operation to a yet
larger extent through the work of expert instructors. We
need a much fuller recognition of this principle, not as the
occasional or unusual accompaniment of the introduction
of a new system, but as an organic part of our regular sys-
tem. We need to incorporate the staff idea into our settled
industrial policy, so that expert direction as to relations
with employees, as to equipment and its maintenance, as to
materials, as to methods and conditions, as to performance,
shall operate throughout our works not in series but in
parallel, and shall be available at every point, to every man,
in every job, at every time.

The average foreman is not — could not be — able for
all this. He is rarely strong in even one of the three parts
into which Mr. Gantt divides the labor problem — finding
out what is the proper day's task for a man suited to the
work, finding out what is the compensation needed to in-
duce the man to do that work, and planning so that the man
can do the work continuously and efficiently. These are
the things that control the result of all our industrial ven-

PRINCIPLES OF INDUSTRIAL ORGANIZATION 45

tures. After we have laid our plans and bought and in-
stalled our machines and assembled our forces and organized
our whole complicated establishment, with its investment
of money and hopes and expectations, the result depends
very largely on the efficiency of the individual workman.
The cultivation of high efficiency is a matter of vast im-
portance not merely to the invested capital, but to the eco-
nomic and social future of the country. It has been left
in the past very largely to the foreman, and because he did
not know and could not know the conditions that produce
inefficiency, and the means of cultivating efficiency, the out-
put of the average worker (in the estimate of very careful
students of the question) is not one-third of what it should
be and can be without any increased tax on the body or
brain of the operative. Here is an opportunity for the
conservation of human resources which comes nearer
home even than the conservation of coal or of water
powers.

The defect of the average, usual, old-line organization
is that, in the desperate speed of industrial expansion, it has
tried to meet the onslaught of conditions, the mere quanti-
tative problem of expansion, by throwing itself into the only
form with which humanity (as the heritage of centuries of
fighting) is intimately familiar — the military form. The
ordinary philosophy of management is (to borrow a defini-
tion from Harrington Emerson) " autocratic authority at the
top — delegated authority and imposed responsibility all
down the line, and anarchy everywhere." Just as in em-
ergencies each man below turns to the man above, so in
ordinary routine the order is reversed. The president " puts
it up " to the general manager, the general manager "puts
it up " to the superintendent, the superintendent " puts it
up " to the foreman, the foreman " puts it up " to the work-
man. The work is finally done by, and the efficiency of
actual execution is usually dependent upon, the man of lowest

46 PRINCIPLES OF INDUSTRIAL ENGINEERING

capacity, of least knowledge, of least possible breadth of
vision, of least power to control conditions — that is, the
actual workman. His only source of all help and instruc-
tion is usually but one step higher in knowledge or in power,
and that is a job boss or foreman.

The entire ideal of industrial-engineering organization,
of " scientific management," as it has lately been called, is
diametrically different. It is the study of the plans for
executing the work and of the ultimate operations of the
work itself by the highest expert skill obtainable ; the defini-
tion of the best means for. doing the work by the most
competent specialist obtainable; the reduction of these re-
sults to standard definitions and standard instructions; the
provision of the best apparatus for doing the work, and its
maintenance in the best condition, again by specialized
skill; the careful training of the workmen by competent
instructors to do the job in the best way with these best
appliances, and in the minimum of time; lastly, the provision
of some incentive sufficient to secure the workman's co-
operation, to make him willing to do the work in the way
and in the time that have been studied out. This incentive
may be a day wage, a piece rate, a differential piece rate,
a bonus, a premium, or a purely sentimental reward — " an
imaginary value," as Dr. Junge calls it. These wage
methods are not fundamental institutions in themselves, as
they are sometimes mistakenly supposed to be. They are,
or should be, only the last step in a far broader philosophy
of production. Scientific management, then, involves these
three great steps : First, analysis — or the accurate estima-
tion of productive elements and preventable wastes; second,
standardization of attainable maxima of performance, and
establishment of conditions by which the men may practi-
cally reach these maxima ; third, and last, devising an incen-
tive by which the interest of the employee is visibly and
convincingly advanced, parallel with the interest of the em-

PRINCIPLES OF INDUSTRIAL ORGANIZATION 47

ployer, as the workman approaches and reaches or even sur-
passes the standards set.

To sum up in three words: The elements of scientific
management are analysis, standardization, incentive.

The difference between it and ordinary management is
that it provides for these things, while ordinary manage-
ment provides only for the transmission of orders and
maintenance of discipline, with little or no instruction or
assistance to the workers.

To put it in still another way: by co-ordinating the two
elementary ideals of management — line, for permanence,
authority, discipline; staff, for development of high func-
tional efficiency — "scientific management"1 restores, both
to the job and the man, the identity — the individualism —
which under ordinary management is lost by a policy of
wholesale dealings and mass relations.

At the present time two leading schools of scientific
management seem to be forming, characteristically asso-
ciated with the names of F. W. Taylor and Harrington
Emerson. It is hardly fair to the subject or to the reader
to attempt to point out in a brief paragraph their distinctive
doctrines, for each requires and has been given by its chief
sponsor an exposition reaching the dimensions of a fair
sized book.2 As an introduction or an incentive to further
study, however, the following summary is offered:

The Taylor system displaces ordinary management by
the introduction of a highly specific, distinctly defined

1 The term " scientific management " is used with some reluctance be-
cause of its general current employment in a restricted and specialized
sense. Scientific management means only the application of scientific
principles and methods to the work of management. The sciences in-
volved may be, and are, several. Scientific management can not be re-
duced to a formalized and formulated system, although a systematic
scheme of management may be based on scientific principles.

2 See "Shop Management," by F. W. Taylor; Trans. Am. Soc. M. E.
June, 1903. No. 1003. See also " Efficiency as a Basis for Operation and
Wages," Harrington Emerson ; The Engineering Magazine.

48 PRINCIPLES OF INDUSTRIAL ENGINEERING

" functional force." The performance of work is first di-
vided into two phases — planning and execution. Each of
these phases is separated into four major functions. The
four functional representatives in the planning department
are " the order of work clerk," " the instruction card man,"
" the time and cost clerk," and " the shop disciplinarian."
The four functional representatives in the active work of
the shop are " the gang boss," " the speed boss," " the in-
spector," and " the repair boss." There may be one or
many representatives of each function, depending upon the
frequency with which their function necessarily brings them
in contact with the men; but within any one function, the
workman looks to the particular boss of that function for
his orders and assistance. The workman takes orders from
eight different bosses instead of from one only as under the
ordinary system of management. The details of the sys-
tem are also highly specific, as, for example, that all work,
tools, and equipment parts are symbolized, the performance
of every operation is charted, all instructions are written,
etc. The salient feature, however, is that the old line
organization is discarded, and eight functional lines are
put in its place.

Emerson leaves the old line intact, but supplements it
with an expert staff, who bring to bear highly specialized
knowledge and skill upon the various elements of operation
that are susceptible to improvement. These might be, for
example, such matters as the economical burning of fuel, the
custody and issue of materials, the cutting of metals, the
care of machinery and equipment; these are random illustra-
tions only. The staff organization would be specialists in
the subjects of largest influence upon economy of operation,
but their knowledge would be applied, not by direct orders
to the workmen, but by guidance, instruction, suggestion,
counsel, to the regular line officials. Emerson's faith is
not in methods, but in principles of efficiency and their pur-

PRINCIPLES OF INDUSTRIAL ORGANIZATION 49

suit by a line-directed and staff-guided organization, adapted
to the circumstances and conditions of any given operation.
These principles of efficiency are: Ideals; Common-Sense
and Judgment; Competent Counsel; Discipline; the Fair
Deal; Reliable, Immediate and Accurate Records; Plan-
ning and Dispatching; Standards and Schedules; Standard-
ized Conditions; Standardized Operations; Written Stand-
ard-Practice Instructions; and Efficiency Reward.1

In the acceptance of fundamental ideas and foundational
data there is no important difference between the two
schools. In methods of practice there is a very wide dif-
ference, the latter being much the more elastic. One of the
first precepts of the Taylor school is that no half-measures
are possible. The system must be adopted in its entirety or
let entirely alone. From Emerson's doctrine of efficiency,
on the other hand, follows the deduction that betterment
may proceed by almost infinite gradations, depending on the
willingness and thoroughness with which the principles of
efficiency are accepted and applied.

In the early sections of this chapter organization and
system were spoken of as being effective in controlling large
operations that are beyond the grasp of the individual.
System is the method by which organization works to se-
cure desired results and to maintain control of every item
of work in hand at all times. If, ignoring the conventional
mode of analyzing industrial organization, we look at it
from the point of view taken in the alliterative divisions of
the field listed in the opening chapter, the applications of
system in which we are most interested in industrial en-
gineering will relate generally to six cardinal points.
First, the general institutions and form of management;
second, the provision and custody of material; third, the
handling and payment of labor or u men "; fourth, the care

"The Twelve Principles of Efficiency;" The Engineering Magazine.
June, 1910, et seq.

50 PRINCIPLES OF INDUSTRIAL ENGINEERING

and maintenance of tools and machinery; fifth, the determi-
nation and direction of operations, or manufacturing meth-
ods; sixth, the recording of expenditures and costs — that
is, of money. Our seventh " M " — markets — belong to
the commercial or sales organization, and though equally
susceptible to scientific treatment are not included in the
scope of this study.

System is an ideal that is more or less perfectly embodied
in innumerable concrete " systems " for handling each and all
of these things. There is no universally correct and spe-
cific way of doing any one of them. Always beware of
the man with the panacea. Ideals and principles are funda-
mental and fixed; methods and systems must vary with con-
ditions. The systems that will succeed in any given case
depend on the organization adopted in, and the circum-
stances surrounding, that case. Many misfits and troubles
have resulted from attempts to force cut-and-dried systems
that had succeeded under one set of conditions and in one
environment, upon a plant differently organized and en-
vironed to which these systems were not adapted at all.
There are, nevertheless, fixed principles that can be formu-
lated and should be observed in any system we may adopt in
any individual case.

Management, in its broad sense, includes everything in
the entire range of this discussion. In its limited sense of
the governing and directing body it is ordinarily (as al-
ready said) dominated too exclusively by ideals of " line "
subdivision with insufficient " staff " co-ordination. Very
generally, however, a broad staff or functional segregation
appears in the adoption of what is called the " three-column
form" of organization; that is, the management is carried
on by three co-ordinated departments — financial, manu-
facturing, and commercial. The division is elementary and
logical. First get your money, next turn it into manu-
factured wares, then sell the product. Below this step,

PRINCIPLES OF INDUSTRIAL ORGANIZATION 51

however, ordinary management is unstandardized. All ef-
fective work in the improvement of efficiency must begin
here, either by replacing the existing arrangement by a
" functional force " or by " co-ordinating with it in an ex-
pert staff."

Materials are generally supplied through a purchasing
department, whose duty it is to provide all materials and
supplies in the quantity and quality required by the produc-
tion department, at the most advantageous price possible;
and to verify its purchases to the auditing department for
payment. Materials when received pass into the custody of
the stores department, at the head of which is an official
known as the storeskeeper or storekeeper. In a large
plant there will probably be a general storeskeeper and
a sufficient number of division or assistant storeskeepers and
clerks to handle the work. The duty of the stores depart-
ment is to keep materials in safe custody and orderly ar-
rangement, to supply them to the departments of the fac-
tory on requisitions from proper authority, to account for
their issue, to receive them again, in partly finished or fin-
ished condition, if the routine of the factory operation so
requires, and to maintain an inventory of all material on
hand. Sometimes finished product is delivered from
stores on order of the sales department; sometimes the ship-
ping department is distinct. Obviously both purchasing de-
partment and stores department must be in close touch with
the needs of the production department, but the discretion
given either of them to query or to anticipate production-
department requisitions or wants varies greatly in different
cases, and may be determined by the policy of the concern
or the personality of the officials chiefly concerned. It is
not uncommon, however, for the stores department to be
charged with responsibility for maintaining at all times a
sufficient stock not only of raw materials but of finished
product. The manufacturing department then works al-

52 PRINCIPLES OF INDUSTRIAL ENGINEERING

ways and only upon orders issued by the stores depart-
ment.

The records of materials are usually kept by requisitions
made out in multiple, separate copies going to the manu-
facturing and accounting officials immediately concerned,
and by entering each addition or withdrawal in books or on
cards accompanying each lot or kind of material carried in
stock. The movement of material through the factory is
usually directed and recorded by tags, accompanying each
piece or lot, and distinguished by serial numbers connecting
them with the order or job to which they apply. Multiple
copies of these memoranda, sent ahead, serve to notify re-
sponsible officials further down the line what to look for,
and act as detectors for any delay or discrepancy in arrival.
This system is commonly called stock tracing.

Material in process of manufacture is commonly called
either stock or stores. The terms are rather loosely used,
but the best authority prescribes the use of the term
" stores " for raw material and " stock " for finished product.
This usage, however, is not universal, and very often
" rough stores " or " raw stores " is used to designate un-
manufactured material, and " finished stores," manufactured
material.

Labor, which was listed as the third cardinal subject of
systematic handling, is very diversely managed. Some large
concerns have a regular labor department or employment
agency where applications are filed and examined, and by
which men are engaged in such numbers and at such times
as, the managing officials direct. In other cases the heads
of departments make their own engagements and dis-
charges. Usually the discipline and work assignments of
each employee depend upon his immediate superior, who
may be a very minor official, such as a gang boss or sub-
foreman. Many disciplinarians consider that the power of
promotion or discharge is necessary to the man in imme-

PRINCIPLES OF INDUSTRIAL ORGANIZATION 53

diate command. There are, however, great dangers of in-
justice, and of the exercise of favoritism or spite disastrous
to efficiency of the working force as a whole, if too much
power is entrusted to petty officers. I think this is on the
whole the safer view to adopt. The assignment of work,
even, when not determined by general routine, is now
sometimes advantageously directed from a central works
office, where a work dispatcher has every machine in the
shop displayed before him on a board, with its jobs in hand
or accumulated systematically tabulated on slips, and he di-
rects the next movement for each man and machine on the
floor, as a train dispatcher moves the trains on a railroad.

The individual jobs are usually designated by numbers
connecting them with the work to which they apply. The
time each man works is usually recorded by a representative
of the accounting or auditing or cost department, called a
time clerk or a timekeeper. Very generally each workman
registers his entrance and departure by punching a time
clock or some similar automatic recording device, so that
the total time for which he is paid is indisputable. The
division of his time among various jobs (if his work is of
such character that it is divided among several jobs) is
noted either by himself, by his foreman, or by the time
clerk, who then makes frequent rounds of the shop and
visits every man often enough to keep close track. These
time records, like the material records, are usually kept on
individual cards, which can be assembled afterwards for
such tabulations and cost determinations as are desired and
may be kept as long as deemed advisable for further ref-
erence. The system of payment is determined by the man-
agement in the light of such appreciation as the managers
may have of the virtue and benefits of the several advanced
wage systems, and under such limitations as the prejudices
of the men or the effective restriction of the union may re-
quire.

54 PRINCIPLES OF INDUSTRIAL ENGINEERING

The fourth cardinal point listed for systematic direction
was the care and maintenance of tools and machinery. The
larger mechanical equipment, power transmission, etc., is too
often left more or less vaguely to the engineering or me-
chanical department, from whom it devolves upon the fore-
men. There is, however, a generally recognized and almost
universally established institution called the tool room,
which has two separate functions; one is the custody and
issue of small tools, which are provided, ground, kept in
order, and given out to the men as needed, account being
kept by hanging a brass check representing the tool on a
hook bearing the workman's number. The other and
larger function 'of the tool room is the making of standard
and special tools, jigs, fixtures, etc., and the repair of ma-
chines and machinery. The province of the tool room,
however, is seldom extended widely enough and the tool-
maker's knowledge of the most efficient operation of ma-
chines and of the principal causes of waste and loss of time
is seldom deep enough, or his authority to institute re-
forms and is seldom great enough, to make the tool room
adequate to drive the plant at its highest capacity. Here
is an opportunity for most profitable use of the staff spe-
cialist.

The direction of methods, our fifth cardinal point, is in a
still more unsatisfactory condition. It is left sometimes to
the men running the machines, sometimes to their foreman
or to a special functional foreman, sometimes to the tool
room, sometimes to the drafting room, and sometimes to
the engineering department or mechanical department at
large. Here is another broad field for the staff specialist.

Systematic supervision of money matters, our sixth car-
dinal point in manufacturing organization, exists in two di-
rections. Both are based, in part at least, on the same data,
but their scope and purpose are quite diverse. The first of
these functions is exercised by the auditor's department. Its

PRINCIPLES OF INDUSTRIAL ORGANIZATION 55

purpose is simply to connect every expenditure with an ac-
tual bona fide transaction — material bought and vouched
for, wages paid for services proved, royalties paid on a veri-
fied contract, machines purchased, buildings erected, etc.
Time and material tickets coming from the shop are merely
vouchers to the auditor, to warrant his O. K. of requisitions
on the treasurer for the payment of bills or the drawing of
payroll checks. Beyond this, he is not in the least concerned
officially. If John Smith is certified on the payroll for 60
hours, as proved by the time clock, and at 25 cents an hour
as certified by his general foreman, the auditor approves
his payroll check for $15 without further question.

But the second department concerned in money matters
has a different function; this is the cost department. The
time and material cards, having served as auditor's vouch-
ers if necessary, are taken in hand by the cost department
and sorted by numbers so that all cards belonging to any
particular job, machine, or desired item of product fall to-
gether. From these the complete material and labor cost
of any piece or product (or by proper prearrangement, of
any part of a unit of product or of any operation upon any
part) can be figured up and recorded. It is part of the
function of the cost department not merely to connect ex-
penditures with certain manufacturing accounts as the audi-
tor does, but to determine by comparison whether the ex-
penditure and the thing secured by it are in fair proportion.
The auditor went no farther than to find that John Smith
put in 60 hours by the clock. The cost department divides
up this 60 hours, job by job, and it can or should compare
John Smith's time on each job with recorded times made by
other men on the same jobs. If he has been soldiering and
has done altogether in 60 hours only what the records show
that other men have previously done in 25 hours, the facts
are made clear and proper action can be taken.

The cost department, properly conducted, may thus be-

56 PRINCIPLES OF INDUSTRIAL ENGINEERING

come a mine of valuable information, first for the shop
superintendent in helping him to prove the comparative
worth of his men, and next for the commercial or sales or-
ganization, because it shows not only what margin of profit
exists and affords a guide to possibilities of meeting compe-
tition, but it also permits close estimates to be made on new
work, by a comparison with similar jobs in the past and by
compiling unit prices from which the costs of new models
may be built up.

FORMS OF INDUSTRIAL OWNERSHIP

CHAPTER IV

FORMS OF INDUSTRIAL OWNERSHIP

PURSUIT of a systematic inquiry into the science, princi-
ples and institutions by which manufacturing operations
are carried on leads from the general to the specific. It is
therefore proper to supplement the examination of organ-
ization at large by a short survey of the forms of organiza-
tion legally established for the conduct of industrial opera-
tions. These are few and highly specific. For while the
internal regulation of industrial concerns, being governed by
individual freedom, is (as we have seen) far from stand-
ardization, their external relations have been very exactly
fixed by law. Society, in its general care for the rights of
the individual and of property, has prescribed certain def-
inite forms of ownership by which the manufacturing plant
may be held and operated.

The first and simplest of course is possession and oper-
ation by the individual owner. It is scarcely necessary to
comment upon so familiar an institution as single propri-
etorship. The condition is one that has probably come un-
der the personal observation and experience of all of us, and
if we magnify the cobbler's bench up to the huge shoe fac-
tory, or the little jobbing foundry up to the gigantic iron
works, the legal position of the individual proprietor is
substantially unchanged. He may hire such assistance as he
desires, delegate to employees such of his powers or func-
tions as he sees fit, carry on the most diverse occupations if
he think best. His credit is such as he may establish by
his character and property qualifications. His liability ex-
tends to all that he has, subject only to the ordinary legal

59

60 PRINCIPLES OF INDUSTRIAL ENGINEERING

exemptions, to which all men are entitled. In short, he has
all the authority, all the profits, and all the responsibility,
and he carries on business as he sees fit, subject only to the
general law of the land.

One qualification of the individual freedom to carry on
an individual proprietorship without public notice or legal
restraint should, however, be noted. If a man elects to
operate not under his own name, but under such style as
the Elite Foundry or the Vacuum Process Co. or the Ex-
celsior Machine Shop, although in fact he is sole owner and
proprietor, he must file in a designated public office (in
New York State, the office of the county clerk) a state-
ment setting forth who is actually carrying on the business
and all necessary information to advise the public duly of
the facts and the person responsible for the acts, obligations
and debts of the business.

There is no necessary limit to the size of the business that
may be conducted individually. The Krupp works were
so carried to a foremost position in the iron and steel in-
dustry of the world; and I believe they are yet (or at least
they were quite recently) under individual sole ownership,
though the actual management had been turned over
largely to a Direktorium of twelve members.

For reasons of convenience or finance, however, it often
becomes expedient for an owner to divide his duties, profits
and responsibilities with one or several others, who become
joint owners with him, in equal or unequal proportion as the
special arrangements may determine. In the case of a new
business several men may thus associate themselves in joint
ownership at the outset, each contributing his share of
money and his particular talents and work to the prosecu-
tion of the business. In the case of a business which has
been running as a sole proprietorship, the original owner
may want to attach an important employee permanently to
the business by giving him a share in the results, rather than

FORMS OF INDUSTRIAL OWNERSHIP 6 1

a mere salary independent of the results. He may want to
bring in more capital without borrowing against his own
credit. Or he may want to bring in some special knowl-
edge or skill or some trade connection possessed by some
special individual. In either case, or for whatever motive,
we have as the result a second form of industrial unit, no
longer single, but compound; this is the partnership or joint
partnership or firm, as it is variously called.

A partnership is a group of individuals (usually a small
group) who have joined their property, services, and credit,
for the purposes of conducting business for their joint ben-
efit This relation is established by agreement between
themselves, but it is subject to certain regulations or limita-
tions or definitions, both under the old common law and by
statute. These statutory provisions concern both the rela-
tions of individual partners to one another, and relations of
the entire partnership to outside individuals or to the public
at large. You can readily see how the creation and use of
the partnership as an industrial institution would necessarily
give rise to a body of partnership law. Smith, Jones and
Robinson, doing business as a partnership, owning certain
property, machinery and materials in the firm name, mak-
ing a contract with you to employ your services as superin-
tendent, or to buy from you a steam engine which you are to
build on their order, are, plainly enough, a distinct entity,
separate and different from either Smith, or Jones, or Rob-
inson individually. If John Smith individually contracts
with you to do or supply some thing, you know that you
are to look to him personally for performance of that con-
tract and that he can be held financially responsible to the
extent of his entire property for faithful performance. But
suppose Smith, as a member of the firm Smith, Jones and
Robinson, makes a similar contract; has he divested him-
self of two-thirds of his responsibility by taking in these
two partners? Or if the contract is not carried out and it

62 PRINCIPLES OF INDUSTRIAL ENGINEERING

proves that Smith, after all, has no property from which
you can recover damages for the non-performance, can you
take Jones's house or Robinson's bank deposit to make you
whole in a negotiation which was originally begun with
Smith?

These and other questions of the rights and duties of
joint partnership are settled by rules of law or by statutes
which vary somewhat in different countries and states. In
general, however, a partnership, and each and every partner
in that partnership, is bound by the act of any member of
the partnership done in the name of the firm and within the
scope of his apparent authority. In other words, each part-
ner is a general agent of the firm, with full authority to do
any and every act necessary to the transaction of the firm's
business. Each partner, also, is liable for all contract obli-
gations of the firm, whether incurred by himself or some
other partner, and each partner is liable for wrongful acts
committed by one or more of his fellow partners within the
scope of their apparent authority.

For instance, suppose Smith, Jones and Robinson are a
firm of iron founders, and Smith, driving a truck load of
castings for delivery to a customer, negligently runs over a
pedestrian in the street and injures him, or negligently runs
into another wagon and overturns it, giving rise to dam-
ages. The firm will be liable for these damages, and if the
firm's property were insufficient to pay the amount awarded,
Jones's personal property or Robinson's might be attached
to pay the judgment for the act done by Smith. This is an
instance of a wrongful act committed within the scope of
Smith's apparent authority as a member of the firm. If he
got down from his truck and beat a man on the sidewalk,
the firm as a firm or the other persons individually would
not be liable, because the act, although wrongful enough,
is not within the scope of his apparent authority.

To a certain extent, therefore, the law makes a partner-

FORMS OF INDUSTRIAL OWNERSHIP 63

ship an artificial person. In the case of liability for acci-
dents the firm's property must be exhausted before the per-
sonal property of its component members is taken. But
when the limit of the firm's property is reached, the persons
are each accountable for debts and acts of the firm as if
these debts and acts were their own personally.

There is, however, an exception to be noted in the case
of special partnerships. A man may enter a firm as special
partner to the extent of a fixed amount of capital and with
the limitation of his liability to this amount of capital ac-
tually contributed; but this is permitted by statute only on
condition that the special partner's stated contribution is
actually all paid in cash ; and furthermore in such cases a
certificate must be duly filed with the proper public official
setting forth who are the general and who are the special
partners, with the amounts contributed by each of the spe-
cial partners, and an affidavit that these amounts have ac-
tually been fully paid in. They must also advertise in the
county in which their chief place of business is located,
specifying the general and special partners and the amounts
contributed by each, and giving a copy of the affidavit and
the articles of agreement. Furthermore, no firm can be
composed of special partners only. There must be at least
one general partner whose liability is unlimited.

To the largest possible extent, however, the law leaves
a partnership as free as an individual in the transaction of
business, with no restrictions as to the number and kinds of
legitimate business a single partnership may carry on. This,
as we shall see, is in contradistinction to the last form of
business organization we are to consider, the corporation or
stock company, which is altogether an artificial person, op-
erating with such powers only, with such scope only, and
under such conditions only, as are expressly stipulated by
the statutes permitting it to exist.

Before taking up the corporation, there is one other but

64 PRINCIPLES OF INDUSTRIAL ENGINEERING

relatively unimportant form of business organization to be
noted.

A joint-stock association is formed by agreement among
its members, requiring no charter and no publication of the
articles. The capital is divided into shares, as in a corpo-
ration, and the shares are freely transferable. It may sue
and be sued by its president and treasurer, and its directors
are personally liable for its obligations after the property
of the association is exhausted. It exists by recognition of
statute.

A corporation is a wholly artificial person. It is recog-
nized by law and created in accordance with the legal reg-
ulation for carrying on undertakings of various kinds, public
or private, eleemosynary or commercial, financial or trans-
portation. We are concerned only with commercial or in-
dustrial corporations. As the corporation exists by pro-
vision of law, it has only such powers, rights, and privileges
as are expressly conferred by law. It has not the natural
and inherent rights possessed by an individual. This is one
of the principal distinctions between the position and con-
duct of the corporation and that of an individual proprie-
torship or firm. Smith, Jones and Robinson may start up
in business as a firm without notice to anybody, if they so
please, and do any and every kind of lawful business they
may elect to carry on. Excepting in the particular case of
a special partnership already referred to, no declaration of
their agreement, nor of their money matters, is required nor
need they declare their respective functions in the business.
They may think it expedient to make a statement of their
finances or of other details to their bankers, or to those
from whom they wish to buy on credit, but it is a voluntary
and private communication. If, however, they decide to in-
corporate as the Smith, Jones and Robinson Co. they must
file articles of incorporation with the secretary of State
and with the county clerk in the county where their prin-

FORMS OF INDUSTRIAL OWNERSHIP 65

cipal office is situated, declaring their purpose, defining the
kind of business they propose to carry on, and the amount
of capital with which they propose to operate. They must
secure from the secretary of State a charter authorizing them
to carry on business; and while the charters of large corpo-
rations especially are often very broad, a corporation is not
in general permitted to do any kind of business not fairly
included in the charter provisions; for example a company
incorporated for manufacturing may not generally engage
in banking, nor may a railroad company engage in mining.

The case of the " Coal Roads " illustrative of this point
is fresh in mind. The charter of the U. S. Steel Corpora-
tion is very broad, but very probably it could not legally en-
gage in the theatrical business in Pittsburg. Corporations
must state in their articles of incorporation the capital (that
is, the amount of money value) which they profess to devote
to the purposes of their business, and they must pay an in-
corporation tax and a tax annually thereafter on this cap-
italization. This capital, however, is often nominal, and
there is no general legal requirement nor provision for pub-
lic inquiry into the equivalence of the capital declared and
the value of the property and funds actually possessed by the
corporation, although New York State subscriptions to capital
stock must be paid in cash or in property at a fair valuation.
That is a matter in which the investor who is putting funds
into the corporation must determine for himself. The mar-
ket value of the stock of any going corporation usually ex-
presses the public estimate of its actual worth. There is,
however, a tendency of late (as part of the movement to
exercise larger governmental control of corporations) to
provide for some official physical valuation, especially of the
property of railroad corporations, with a view to larger
protection of investors against the deceptions of promoters or
of manipulators.

In financial make-up the firm and the corporation differ

66 PRINCIPLES OF INDUSTRIAL ENGINEERING

thus : The proportions in which the members of a firm
share in the ownership and the results of business are fixed
by agreement among themselves. As a general proposition,
no new member may be admitted to a firm, no member may
retire, no member may transfer to another person all or
any part of his interest, without the consent of all the other
members of the firm or without adjustment of the debits or
credits of the firm to date of change. In a corporation the
total capitalization is divided into a fixed number of shares.
Each of these shares has a definite par value — usually
$100, though some large industrial companies have shares
of a par value of $50 and many mining corporations divide
their stock into shares of a par value of $10, $5 or even $i.

These shares are commonly sold in the first instance by
public subscription or given in exchange for properties,
patents, etc., and thereafter are transferable without restric-
tion, passing from hand to hand in the open market, pur-
chasable by anybody in any quantity that market condi-
tions permit. In the case of the large corporations listed
on the exchanges, the stock is traded in to the extent of
thousands, tens of thousands, and even hundreds of thou-
sands of shares a day. Each transfer is recorded if de-
sired by the buyer on the books of the corporation. The
buyer brings in the old certificate endorsed by the former
owner, with proper witnessing signatures, and receives in
exchange a new certificate issued in his own name. The
corporation recognizes as voting members those stockholders
whose names are registered on its stock ledgers at any given
time, and the voting power of each shareholder is measured
by his stock holdings. Thus the membership in a corporation
may be and usually is constantly shifting, both as to persons
and proportion held by each.

There is another very important financial difference be-
tween a corporation and a firm. In a firm, as we have al-
ready seen, each member (except a special member) is like

FORMS OF INDUSTRIAL OWNERSHIP 67

an individual proprietor in that he is liable to the extent of
his entire possessions for the liabilities of the firm. Now a
stockholder in a corporation is not usually liable, either for
its debts or its wrongful acts, beyond the amount of his
stock. That stock may become valueless because all the
property of the corporation is exhausted, and so the stock-
holder may lose what he has put in; but the creditors or the
holders of a judgment against a corporation can not go be-
yond the property of that corporation and attach property
of the individual stockholder. In former times, under the
old law of corporations, a creditor could do so, and in one
famous case in Scotland, the case of a bank, if I remember
rightly, every stockholder, no matter how small his holding,
was ruined by the failure of the bank, the successive assess-
ments to meet the debts of the corporation exhausting finally
the last shilling of the last man. In some places and in
some kinds of corporations there still exists what is called
" double liability." That is, each stockholder may not
only lose originally what he put in, but he may be com-
pelled to pay in addition an amount equal to the ^par value
of his stock holdings if this is necessary to meet the obliga-
tions of the company. This is the case with all national
banks, but with manufacturing corporations it is exceptional
and as a general proposition there is no liability and no as-
sessment collectible beyond the single value of the stock
each member of the corporation holds.

The management of a corporation is vested in a board
of directors elected annually by the stockholders. These
directors in turn elect the officers of the company and ap-
point its chief officials. The law requires that there shall be
certain specified officers, in New York a president, a secre-
tary, and a treasurer. Other officers may be added if de-
sired. Very frequently in large corporations there are sev-
eral vice-presidents, each heading one of the principal di-
visions of the corporation's work. One, for example, may

68 PRINCIPLES OF INDUSTRIAL ENGINEERING

be a financial man and look after marketing of bonds or notes,
loans, and banking and financial affairs generally; another
may direct the commercial or sales department; a third may
be a technical man in charge of manufacturing or produc-
tion; a fourth may be a lawyer and control the legal work,
the drawing of contracts, patents, etc. The general man-
ager, who is the active executive official in direct charge of
the principal activities of the corporation, is very often, per-
haps generally, not a director, although in many cases the
president or vice-president is also general.manager.

Directors are elected for a term of one year by a majority
vote of all the stock represented at the meeting. A single
share may thus determine the control of a large corpora-
tion. In our larger and better companies, however, it is
generally conceded as a moral right that a large unified
minority interest shall have representation on the board of
directors. If " cumulative voting " is provided for in the
constitution of the company, a respectable minority may be-
come actually able to elect a director, irrespective of any
moral right to representation. The amount of freedom
given to individual officers or officials (freedom, that is, to
act without prior approval by the directors) naturally varies
greatly with the circumstances. Very generally, an exec-
utive committee of limited membership, easily got together
for consultation by the general manager, has plenary powers
and decides even very important matters without calling to-
gether the full board, merely reporting its action for con-
firmation at a later regular meeting. But in an issue, the
majority vote of the board of directors decides. You often
see, therefore, a struggle for control of a large company
thrown into the stock market, both sides striving to buy up
floating stock so as to control votes in the election of a board
of directors who will carry out their policies.

There is an old saying that a corporation never dies.
Even a corporation may be extinguished under proper legal

FORMS OF INDUSTRIAL OWNERSHIP 69

procedure by settling all its obligations, dividing its assets
pro rata, and surrendering its charter. But a corporation is
not affected as to continuity by the death of any individual.
It is immaterial to its mere existence who owns any part of
its stock. An individual proprietorship or firm, on the
other hand, may be very seriously embarrassed and even
unwillingly forced to wind up by the death of a sole owner
in one case or of a partner in the other. Some difficulty or
embarrassment in administering the estate of the deceased,
some quarrel among the heirs — if no one interest is strong
enough to buy out all the others, may leave no alternative
except to close out the business. But as the corporation is an
artificial entity, wholly independent of any of its component
members, it goes on unaffected.

For this reason, as well as on account of the limitation of
liability already spoken of, a corporation is strongly favored
even for businesses which are essentially proprietary. A
man may make a stock company of his own business, dis-
tributing just enough shares to secure the legal number of
stockholders, and electing officers from members of his own
family or entirely trustworthy friends, and thus may give his
business a form in which it may be perpetuated without dan-
ger of immediate collapse at his death. For this and other
reasons industrial undertakings in the United States tend
more and more to be conducted under the form of an in-
corporated company.

The money paid in by the stockholders when the com-
pany is first organized is its capital stock or capital. This
is used to provide (or, as already noted, it may in part al-
ready have the form of) buildings, machinery, patents, and
equipment. That part of the capital which is not perma-
nently crystallized in these fixed forms — that part which
remains in " liquid " form — is called the working capital,
in centra-distinction to the other or fixed capital. As earn-
ings or profits begin to come in and accumulate, the total

70 PRINCIPLES OF INDUSTRIAL ENGINEERING

value of all the assets of the company becomes something
more than the original capital. This excess value is called
surplus. From time to time, if the directors think wise, a
portion of the accumulated earnings is distributed pro rata
among the stockholders, profits so distributed being known
as dividends.

That portion of the property of a corporation which con-
sists of money or things which can readily be converted into
money, such as good accounts due the company, bills receiv-
able, marketable securities belonging to other corporations,
or perhaps even readily salable merchandise, is called the
" quick assets " of the company; while that portion consist-
ing of buildings, machinery and equipment installed, patent
rights, etc., which can not readily be turned into cash, is
called the fixed assets of the company. This is a classifica-
tion which has nothing to do with capital and surplus. A
large part of the capital of the company might be in the form
of quick assets, while conversely all its surplus might have
gone into a form in which it can not be converted into money
at all, as, for instance, in the case of a telegraph company
which constantly put a part of its surplus into extending its
lines.

A corporation may usually buy, own and hold the stock
of another corporation just as an individual might own it.
But in the case of railroads, this right has of late been con-
siderably limited and abridged by statute. For conven-
ience, to segregate its activities, or to avoid overstepping its
charter, a large corporation will often organize a subsidiary
corporation to carry on some contributing industry. A steel
company might thus organize a subsidiary transportation
company to haul its ore or products, or a subsidiary mining
company to produce the ore, or a subsidiary tin plate or wire
mill to work up its products. The parent company might
then own all the stock of the subsidiary, appoint all its di-

FORMS OF INDUSTRIAL OWNERSHIP 71

rectors, and receive all its dividends, which would then go
to swell the profits of the parent concern. Or it might sell
part of the stock of the subsidiary companies in open mar-
ket, retaining only a majority control.

There are many other applications of corporation law
such as the organization of a holding company, or a con-
struction company, which are of high ingenuity, but too
frequently of very low morality. Many of them are de-
signed to evade the intended limitations of corporate powers,
or perhaps to segregate all the assets in the unassailable pos-
session of one corporation, while all the liabilities are in-
curred by another. These devices are not creditable to
American finance, and the evils they have created, the
abuses to which they have given rise, are the prime cause of
the public hostility toward corporations which is causing the
present industrial disturbance and preventing a full meas-
ure of industrial prosperity. Such legal and financial
legerdemain has no place in our consideration. We are con-
cerned only with a brief general outline of the principal in-
stitutions by which industrial operations are carried on; and
having now broadly sketched such an outline, we will pro-
ceed to an equally rapid survey of the methods generally
followed in the particular department in which we are spe-
cially interested — the manufacturing or production de-
partment of a large organization. That is, we will resur-
vey the operations of organized manufacturing, not sci-
entifically dissected and disconnected as in the foregoing
chapter, but in actual operation.

The fundamental proposition is that nothing shall be
made — no order to manufacture shall be given out —
without authority of some duly authorized and responsible
official. Whether the article to be manufactured is special,
from special or original plans, or whether it is a stock article
made by standard patterns, someone in authority " vivifies,"

72 PRINCIPLES OF INDUSTRIAL ENGINEERING

by his signature, the order that starts the process of manu-
facture. Such an order to manufacture an article or a lot
of articles is usually called a production order.

The production order is general. It may call for (say)
" 20, No. 2 milling machines," or " 10 Eclipse engines,
8x12 " or " 100 type C, 10 k.w. d. c. motors." Every pro-
duction order is therefore likely to involve several or many
different items or acts of production. The production order
is therefore first sent to the engineering or drafting depart-
ment and is there reduced to these specific elements,
although, in the case of strictly standard products, standard-
ized lists of details may be filed in the production depart-
ment and may be taken off as a matter of routine. In either
case, the production order next appears as an itemized list
of materials and jobs, immediately understandable by the
shop officials. The superintendent of the shop or depart-
ment or his duly authorized subordinates then secure the
materials needed, by a requisition upon another department
which has custody of all materials. This department is
called the stores department. The materials being secured,
the various jobs of work upon them are then given out to
individual workmen, sometimes by a central work-dispatch-
ing office, sometimes by the foremen of the various depart-
ments. These separate orders to do specific parts of the
work are generally called works orders or job tickets. Each
job ticket, for convenience in accounting with the men, has
its own serial number; but each job ticket carries in addi-
tion the number of the general production order to which
it belongs.

Each work order or job when finished is delivered to the
finished-stores department, or to the assembling or erecting
department by which it is in turn delivered to the finished
stores. Notice of the completion of the entire production
order, or of each installment of it until it is complete, is
returned by this finished-stores department to the office from

FORMS OF INDUSTRIAL OWNERSHIP 73

which the production order originated — and the cycle is
thus completed.

The original production-order number appearing on the
ticket or instruction card accompanying each job passing
through the shop serves to identify it and direct it surely to
the intended destination, though it may be mingled among
all sorts of other work at various points on its way. This
is something like the way in which an address carries a let-
ter to its destination, although that letter travels part of the
way in the mail bag with thousands of other letters. Rec-
ords of starting and finishing times- for each job are made
on the individual job tickets; these serve as checks against
the total time of the workmen employed, and afford data
for cost computations. Manifold copies of the production
orders and the work orders, sent ahead to the departments
participating in their production, notify these departments
of work in progress for which preparation must be made.
When the original comes through with the completed job
it falls naturally into the files under the same number with
the manifold, thus automatically announcing and identify-
ing itself. Manifolds of which the originals have not yet
appeared reveal work unfinished or delayed. You have
here a hint at the basis of the system of stock tracing by
which the operations of the plant may be kept up to
schedule.

It will be noticed, probably, that the cycle of manufactur-
ing begins and ends in the stores department. Before the
operations can begin, material must be secured from the stores
department by authorized requisition. When the process
is complete, the finished goods are delivered to the stores
department again for shipment or delivery. Indeed, mate-
rial is supposed to be always in the custody of the stores
department — is supposed to be and often is actually returned
to the stores department after each successive step or opera-
tion in the entire process of manufacture. It is, therefore,

74 PRINCIPLES OF INDUSTRIAL ENGINEERING

frequent and very good practice to proceed upon the theory
that the stores department is the responsible agency for see-
ing that a stock of both finished product and raw material
is always maintained sufficient to meet the expected demands;
that all shipping orders are issued to the stores department
and not to the manufacturing department; and that what-
ever manufacturing orders are necessary for the maintenance
of the warehouse stock of finished product, shall be issued
by the storeskeeper. Even in the case of special machinery
the same routine can be observed, except that in that case
the finished product of Course will not be stock and will have
to be manufactured in accordance with the special designs
after the shipping order has been received. A very impor-
tant function of the stores department, therefore, is to insure
against delays or interruptions either to manufacture or to
shipment which would occur if items in the stock of either
raw or finished goods were allowed to run out, and at the
same time to avoid tying up an unnecessary amount of capi-
tal in wasteful idleness by keeping too large a stock either
of raw materials or of finished product on hand. The
actual procurement of raw materials is generally handled by
a sub-department called the purchasing department, which is
responsible for quality, prices, and arrivals of the requisite
supplies, but makes purchases only upon requisition from the
stores department, so far at least as materials are concerned.
In many cases machinery, tools, fuel or equipment not clas-
sified as raw material for manufacturing purposes and not
kept in the storekeeper's stock, are purchased directly upon
requisition from departments by which they are used.

The last great industrial function recognized by a sepa-
rate department is selling. In several senses it dominates
the whole. Things are not usually made unless they can
be sold. In cases of special manufacturing, such as ma-
chinery made to order from individual plans, the manufac-
turing plant produces what the sales department specifies.

FORMS OF INDUSTRIAL OWNERSHIP 75

In the case of standard stock manufacturing, like watches
or sewing machines, it turns out an article for which the
sales department can find a demand. On the other hand,
the operations of the sales department will not result in
profits unless they are carried on with a correct knowledge
of manufacturing department costs, of the limits of the manu-
facturing department's ability or capacity, and so on. There
must be close co-operation and co-ordination. The engi-
neering department is to a considerable extent the co-ordinat-
ing center between manufactures and sales. But being a
little nearer to the latter, it is usually found forming a sub-
division or part of the selling department.

Certain very able critics have urged forcibly that modern
tendencies, especially American tendencies, are toward over-
magnification of the salesman and his functions, and under-
appreciation of the engineer and his capabilities. It is a
natural frailty, whether human or commercial. The sales-
man is the man who brings the money in. The engineer
usually directs its outgo. The man who visibly or ap-
parently stands nearest to income and profits has the first
consideration. But it is a serious fact that in a large way we
have nationally devoted too much thought to obtaining and
raising prices — a salesman's function — and too little to
lowering the costs of production — an engineer's function.
Attention to lowering production costs by cultivating higher
efficiency, by eliminating wastes of material, of labor, of
power, or of any other industrial element, is now at a phase
of rapid increase. It is here that the greatest opportunity
lies for the industrial engineer and the works manager.

THE NATURE OF EXPENSE

CHAPTER V

THE NATURE OF EXPENSE

LEAVING now the general principles of industrial or-
ganization and the institutions and agencies by which
industrial operations are carried on, we may view the prob-
lems of manufacturing as they present themselves to the
works manager and study the several elements of these prob-
lems from his characteristic point of view. In practice, the
processes of manufacture fall naturally into four great di-
visions:— First, gathering materials of various sorts neces-
sary to the product we plan to turn out; second, operating
upon these materials in some way so as to change their form,
condition, combination, location, or bulk; third, distributing
again among buyers that which we have previously gathered
and manufactured; fourth, overseeing, safeguarding and
promoting the whole cycle. To put it more briefly, the
steps are: procuring raw materials, making them into finished
product, selling our goods, managing the business. To re-
duce it to four words, the functions are purchase, produc-
tion, selling, administration. All are necessary to the con-
duct of a manufacturing business, but to the manufacturer's
mind some elements in the scheme, such as outlay for
material and direct labor, seem to be visibly embodied in the
finished product, and these he calls "productive"; others,
like the outlay for administration, are only indirectly identi-
fied with the finished product, and are classed by him as
" non-productive." Therefore, as the manufacturer always
thinks in terms of cost, every proposition in production ap-
pears in his mind as consisting of three terms — labor,
materials, and expense.

79

80 PRINCIPLES OF INDUSTRIAL ENGINEERING

Let us examine this position again in more detail and
from a slightly different angle of vision. All business is
carried on for the sake of making money. In the simplest
conceivable kind of accounting, we would put down on one
side of the account or in one place a list of everything we
spend in the course of carrying on our business, and on the
other side of the account or in another place we would put
down a list of everything we receive. The difference be-
tween the sums of these two lists would be our profit.

Now if our business is manufacturing, we shall always
find, if we examine the items on the debit side — that is, the
list of expenditures — that these items fall naturally into
three great groups corresponding to three distinct sorts of
thing for which our money has been expended. One of
these groups will contain all the expenditures for the ma-
terials we use in our manufacturing — iron, steel, brass,
wood, cloth, whatever it may be. The second of the three
great groups into which we can divide our expenditures will
contain all the outlay for labor — the money that we have
paid to men for working and making up these materials
into our manufactured product; and the third of the great
groups will contain a list of expenditures for things that do
not go into our product as labor and materials do, but yet
are necessary to carry on the business. Such items are
advertising, selling, office salaries, insurance and repairs and
so on. This third great group of expenditure, then — this
group of items of outlay for things that are necessary to
carrying on the business and yet do not go directly into
the product — this is called expense.

In one sense there is not an absolutely hard and fast
line between these three classes of expenditure. In one
sense expense overlaps, so to speak, both material and
labor. For example, in a foundry, moulding sand is
physically speaking " material." In a brick yard, lumber
for runways is in the same sense a " material." But in

THE NATURE OF EXPENSE 8 1

neither case does it go into our product. It is not sold
with our product. We can not find or weigh or measure
a fragment of it in each piece of our product. It is used
up and disappears, but the cost belongs to the business as
a whole.

So men carrying messages about a factory, or carting
shavings from a planing mill, are humanly speaking " la-
borers " — labor. But again they are doing work that can
not be directly charged to any particular job — it is part
of the necessary general cost of the work as a whole.

From the accounting point of view, then, the deciding
question is — does the material or the labor go directly into
product; can we trace it there and say definitely u so much
material and so much labor make up this article " — or
does it merely serve in some general way the making of
all or many of the articles we are turning out? If the
latter, then it is an expense item, to the accountant, even
though in a dictionary sense it might seem to be material or
labor.

Some accountants recognize this sort of double character
of certain items by calling them " expense material " and
" expense labor." It is more common, however, to speak
of the three divisions of cost as direct material (or simply
material) direct or productive labor, and " expense " in-
cluding in the latter term all indirect material and labor.

Whether the manufacturer's money is expended for ma-
terials, for labor, or for expense items, he has one great
general object, and that is that it shall be expended wisely,
economically, and efficiently. But when we get beyond this
first principal purpose and care, which is always in a manu-
facturer's mind, we can readily see that the things to be
considered second are of different and characteristic natures
in the case of materials and of labor and of expense.

The points in which the manufacturer is especially inter-
ested, so far as concerns materials, are to make sure that

82 PRINCIPLES OF INDUSTRIAL ENGINEERING

they are provided and maintained in sufficient quantity for
the operations of manufacture to go on without interruption,
that receipts are verified, materials on hand properly stored
and cared for, and materials in manufacture moved safely
and in an orderly way from process to process until the
manufactured product is complete.

In the case of labor the manufacturer's leading care and
anxiety is to secure enough workers of desirable quality,
to keep them contented, to increase their productivity, and
to keep track of their time.

The fundamental problem of expense is distribution.
That is, if our business is to be intelligently and success-
fully carried on, after we have accounted for the money that
we have paid for materials and found out how much of it
has gone into each unit we have manufactured, and after
we have paid for our labor and accounted for the time and
wages spent upon each unit of our product, we must be able
to take the rest of our expenditures — the confused total bulk
of general expense, which is neither direct labor nor direct
material and to divide it up into a multitude of little frac-
tions, each corresponding to one unit of our product, and
we must make this division and u levy this assessment " so
that we can say confidently that' we have charged each unit
with its fair, reasonable, and just proportion; that we have
assessed to each unit of product the actual cost of the ma-
terial that went into it and the labor that was put upon it,
and its proper share of the general expense of carrying on
the business. If we do this correctly we are sure that
when we have added to these costs a proper percentage of
profit, we will make money if we can find a market for
our goods.

The importance of being right about it is this: If we
make a mistake in the distribution and charge some . one
line of our product with more expense burden than it ought
to bear, a clever competitor who knows his costs better

THE NATURE OF EXPENSE

than we know ours, will make a lower price which still
leaves him a safe margin and he will undersell us and
take away our market. If we charge some one line of our
product with less expense burden than it ought to bear,
we shall probably get the business in that line away from
our wiser competitors who are asking correct prices, but
the more we sell the more money we shall lose.

In other words, the reason that makes it necessary to
have a correct knowledge of our costs is competition. "And
in the correct knowledge of costs, the most difficult and
at the same time the most necessary thing is the correct
distribution of expense. Mr. A. Hamilton Church, who
is one of the leading authorities on the distribution of ex-
pense burden, says: " Very few concerns have come to grief
by ignoring labor costs " (or he might add material costs),
" but many have passed into the hands of receivers by
ignoring the relative importance of other factors of pro-
duction."

K

Selling Price —
$600

— Inclusive or Total Cost™
$500

-Shop Cost~ — >!

$400
Prime or Flat Cost— — *i

^i

"1

$150
Material

$150
Labor

$100

Factory
Expense

$100

General
Expense

$100
Profit

We may represent by this simple diagram the several frac-
tions making up total costs, and the several parts of which
the final selling price of an article is made up. The relative
proportions of material and labor, factory expense, selling
expense, and profit vary widely in different cases. The pro-
portions used in the diagram are wholly arbitrary, but are
not improbable.

84 PRINCIPLES OF INDUSTRIAL ENGINEERING

The figure serves to show the significance of the terms
commonly used in cost accounting, and to emphasize the
division of expense into two parts, the first called u factory,"
" shop," or " manufacturing " expense, and the second
called " general," " commercial," or " selling " expense.
This division is commonly in use and is logical. There is
no necessary connection between the expense attending the
making of an article and the expense of selling it. They
may be relatively very different. There is hence no reason
why these two expense elements should be distributed at
the same time or in the same ratio, and indeed there are
many reasons why they should not.

The discussion following will leave until last the rational
mode of apportioning general expense among the varied
products of any establishment, and will take up first and
at greatest length the distribution of factory expense.

Now if our product is simple and all of one kind, the
determination will be easy enough. It is when product is
diversified that accurate cost accounting becomes difficult
and at the same time becomes more important. Suppose,
for example, we are running a cotton-seed oil mill and mak-
ing a single grade of oil. The cost per pound is very
simply found by dividing total expenditures by the total
number of pounds made. But suppose, further, we decide
to branch out and work up our own product. We install
a refinery and begin to put out a fancy grade of oil for
table use; we get up a " lard substitute "; we install a soap
works and make several grades of toilet and laundry soap ;
we follow with a glycerine plant; and finally we manage
to do something with several kinds of by-products. Now
we have a number of different products, selling at very
different prices, in different markets, and under different
conditions of competition. There may be big money in
lard compound, while the soap market is so hard pressed
by competition or so captured by large manufacturers who

THE NATURE OF EXPENSE 85

lavish money on advertising that we can not sell soap at
a profit. But unless we know accurately what lard com-
pound costs us per pound, or what soap costs us per box,
how can we tell that there is a profit in one and a loss in
the other? How can we know that we should put all our
raw material into lard compound and cultivate that market,
and that we should shut down the soap factory? Knowl-
edge of costs is the guide to success and, indeed, a necessity
to existence in modern commercial manufacturing.

In this exact determination of costs the most troublesome
factor as already stated is the element of expense. Material
and labor are fairly concrete, definite and tangible things.
We can see them, weigh them, measure them, and connect
them directly with the product they assist to form. If we
take any single article in the whole output of our plant,
whether it is a pound of cottolene, a cake of soap, a hat,
a globe valve or a dynamo, we should be able by com-
paratively simple records and accounts to know exactly the
value of the material that went into it, and exactly the out-
lay for the direct labor that has been expended upon it.

But in the total expenditures of any manufacturing busi-
ness there is a very large outlay (usually a very large frac-
tion of all the outlay) that is not for material, and is not
for labor, and yet we must get it back from our customers.
A proper proportion must be repaid to us in the price we
get for each bit of product we sell. If each article sold
does not repay us for its just proportion of these general ex-
penditures, as well as for its just proportion of material
and labor, our business will be headed toward failure and
not toward success.

It is these miscellaneous expenditures, not of themselves
productive of anything and yet necessary to the production
of things, that make up the expense account.

Among them are rent or interest on the cost of land
and buildings, insurance, repairs, salaries of general officers

86 PRINCIPLES OF INDUSTRIAL ENGINEERING

or officials, of clerical staff and all unproductive labor,
power, light, heat, legal expenses, advertising and selling,
etc. The total is a load bearing upon the extra business,
and each item of product must carry its share — hence
the figure of speech, " burden."

The distribution of expense (that is, the assessment of
a just and proper fraction of it as a part of the cost of
each item of our product) is not only one of the most dif-
ficult, but also one of the most controversial and most un-
satisfactory problems of works management or shop ac-
counting. This is because expense is not like the material
and labor components of a manufactured product, which
are absolute, concrete factors — known quantities that are
permanent, fixed and absolute in value. The expense
component of any single item is really an elusive variable,
to which we give a value arbitrarily taken because it solves
some particular case or problem.

Let us illustrate the point again by means of a pocket-
knife. Let us suppose the simplest possible conditions —
that we are making nothing but one kind, size, and style of
knife. Suppose our cost records show that the material used
in this knife is worth 20 cents, and the labor that made it an-
other 20 cents. Our prime or flat cost, as it is called, is 40
cents. We find, perhaps, that by the most careful and cor-
rect compilation and distribution we can make of all our fac-
tory expense (that is, our expenditures for things other than
material and direct labor), this knife should be burdened
with an expense charge of 10 cents — that is, it should be
considered to have cost 20 cents for material, 20 cents for
labor, and 10 cents for expense, in order to return to us
our entire manufacturing expenditure. Let us suppose
that of this 10 cents expense burden i cent goes to pay
this knife's proportion of the president's salary, and I cent
goes toward the general manager's salary, and 3 cents go
for other office salaries, and i cent goes for rent, and i

THE NATURE OF EXPENSE 87

cent for the coal bill, and i cent for general repairs and
2 cents for sundries.

Now suppose we had not made this particular individual
knife. Our cost facts as to material and labor would prove
their absolute truth by transposing the equation. We
should actually save 20 cents for material and 20 cents for
the labor. That 40 cents would remain unexpended and
we should have it in the treasury. We would save 40
cents in actual money by refraining from the manufacture
of this particular article. But our assumed expense fact
goes all to pieces. We do not, by not making this knife,
save i cent on the president's salary, or i cent on the gen-
eral manager's salary, nor do we reduce our rent, or lessen
our repairs, or cut down any of those other expense items
(except possibly the coal) by the figures we attributed to
the expense burden of this individual knife. What does
happen is that all the other knives we do make have to
bear between them just the same total expense as before,
or a little larger expense burden each.

But let us not leave this example without noticing an-
other point. We have remarked so far that a difference
of even one knife more or less in our total product makes
a corresponding actual difference in our total outlay for ma-
terial and labor, but practically no difference in our total
expense account; and we have deduced from this that a
scheme of expense distribution that is true for a certain
volume of output becomes untrue at any other volume of
output, whether larger or smaller.

It would be incorrect, however, to assume that the ex-
pense burden as a whole does not ever vary, or indeed that
it does not vary considerably, with varying volume of busi-
ness. The truth is that expense burden is made up of a
large number of elements, some of which go up and down
in general correspondence with the volume of business and
some of which do not. In other words, our total expense

88 PRINCIPLES OF INDUSTRIAL ENGINEERING

is divisible into two classes — constant and variable. The
former division (constant expense) includes all expense
items necessary, so to speak, to the mere existence of the
business, while the latter division (variable expense) includes
all items connected with the activity of the business.

For example : In the constant-expense section we should
include rent, or its equivalent in interest, insurance and
taxes, if we own our real estate and buildings. This clearly
remains uniform or unchanged, whether the factory be
busy or idle. Another such item is the salaries of general
officers ; they draw their pay the same in good times or in
bad. It is true that on a very great expansion of business
we might have to acquire more ground and put up more
buildings, or rent more space, or enlarge our organization
and add more salaried officers. Or in very dull times we
might give up some of the property we have been renting
and we might cut down official salaries; and so these so-
called constant expenses may change. But if they change
it is by occasional large steps of this kind. They remain
level for long periods, and there is a minimum below which
they can never go if the business is to continue to exist at
all.

On the other hand, expenses like advertising, selling,
correspondence, clerical assistance, drafting, power, trans-
portation, foremen, yard labor — all these go up and
down on curves corresponding closely and quite sensitively
to the amount of business we are doing, and many of them
can be completely cut off if the plant is wholly shut down.

So the second great point to keep in mind is that while
the ratio of expense to productive labor and materials (or
in other words, the proportion of our total cost chargeable
to expense) is variable and is constantly varying in a way
that from an accounting point of view is very troublesome,
this variation is caused by the fact that a certain very
large part of our expense account is constant, or nearly so,

THE NATURE OF EXPENSE 89

however our total volume of business may vary. It sounds
like a paradox, but the proportion of expense varies be-
cause the total of expense does not. This fixed necessary
outlay stands little changed from month to month, while
the gross income against which this is balanced fluctuates
now up and now down.

The result is that as business becomes more active the
expense ratio drops even though the expense total may
rise, while as business shrinks the expense ratio rises even
though the expense total may fall. This is the reason why
in dull times dividends on industrial and railways stocks are
so frequently reduced or passed. Business may be (say)
50 per cent of normal; purchases are cut down, hours are
shortened, employees are discharged, trains are laid off,
purchases of material are suspended, actual operations and
expenditures for actual production are cut down to one-
half — but profits do not remain at half the normal. They
vanish entirely and a deficit appears instead because the ir-
reducible constant expense eats all and more than the gross
profits earned by the 50 per cent activity.

To come back now to our imaginary knife factory; we see
that while we may be certain enough what our whole ex-
pense account amounts to, the assumption that the indi-
vidual expense burden chargeable to each individual knife
is 10 cents is an assumption only. It is a convenient ap-
proximation to truth which holds good under average con-
ditions, but begins to depart from truth as soon as and as fast
as conditions depart from average. That is the first diffi-
culty in distributing expense burden.

But suppose, further, we are making not only pocket
knives, but also carving knives and safety razors. We can
tell exactly how much material and how much direct labor
each pocket knife, and each carving knife and each safety
razor takes. We can tell exactly how much our total ex-
pense is. But how shall we tell just how much of this

90 PRINCIPLES OF INDUSTRIAL ENGINEERING

total expense is occasioned by the manufacture of a carving
knife, of a safety razor, or of a pocket knife, or whether
there is more general expense occasioned by the manufac-
ture of one of these articles than by another? Does forg-
ing a carving blade consume more power and use more coal
than forging a pocket-knife blade, or does timekeeping and
clerical labor run higher in the safety-razor shop than it does
in the pocket-knife department? Should, therefore, each
carving knife or each safety razor (for these and other
similar reasons) bear a larger burden of expense than each
pocket knife? If so, how much?

May be the carving-knife account does not show satis-
factory profits, and we think of giving up that branch of
the business. But are the apparent profits small because
we are charging it with more than its true share of ex-
pense, and thus relieving the pocket knives and the safety
razors of some of the burden they ought to bear? If we
drop the manufacture of carving knives, will our expense
account drop by the amount of burden we have been charging
up to the carving-knife department, or shall we still find the
same old expense totals bearing now wholly on pocket
knives and safety razors and shall we be worse off rather than
better? Would it be sound policy, instead of abandoning
any line, to add still another that would bring a reasonable
profit over the flat cost of materials and labor, in the ex-
pectation that in fact no increase of expense would be oc-
casioned, and we should be just that much ahead on our
total profit and loss account?

Here we see the second difficulty in the expense distri-
bution, which is to apportion the total properly among
the several or many lines of product in a varied manu-
facturing business, so that the calculated costs of each (on
which we base our selling prices) may be as near as possible
to truth. Then whatever line may expand or contract we

THE NATURE OF EXPENSE 9!

shall be safe from disastrous disappointment in the total
of our profits.

In order to see more clearly how the proportion of ex-
pense justly chargeable to various lines of products may vary
— that is, how various components of expense are created
in unequal proportion by various classes of manufactured
goods, and hence should be borne with corresponding in-
equality by these various classes — and to see also some of
the considerations affecting the distribution of expense, let us
imagine that we are making a hasty tour through a machine-
shop and let us see in part how and where the burden is
created. We will assume that the shop makes its own
castings and we will begin with the foundry. The material
(pig iron) and the labor of molders, helpers, core-makers,
etc., on each and every job and piece, can be pretty closely
recorded, so that our material and direct-labor costs are
reasonably exact. But here are some men who are not en-
gaged in making any special casting into which their work
goes and to which it can be charged; they are wheeling sand,
shaking out flasks, charging the cupola. Here is coke go-
ing into the cupola to be burned, and power being used for
the cupola hoist and for furnishing the blast. Without
searching any further, we find already an aggregated out-
lay — an expense burden — which we can not attach to any
one piece of material or to any one job, but which we must
distribute somehow among all the jobs done that day or
on that melt.

We see however, further, that there is another cupola
on which men are busy making repairs. Evidently there
is an outlay for refractory linings, labor, and incidentals,
which must somehow be loaded on to the foundry product
and repaid by its sale. We must keep our cupola in re-
pair; it costs money to repair it, and we must manage to
get our money back. But this expense was incurred through

92 PRINCIPLES OF INDUSTRIAL ENGINEERING

wear and tear attending the melting of iron for all the
castings made in a week or a month, perhaps. Our total
of this repair bill, then, must be distributed over the jobs
of that whole period if each is to bear its fair burden.

We see, further, that other men are at work removing
dust from the rafters, repairing the roof, and white-wash-
ing or painting the whole foundry building. They are
remedying the deterioration or decay of possibly a year.
Again, money spent in general expenses, to be recovered
in the sale of product. Here is another item of burden to
be spread over a still wider section of our output.

Here, in all these cases, we have burden limited in dis-
tribution according to time.

We pass to the machine-shop, and we see a large overhead
crane transporting a heavy engine bed to the planer. The
crane itself represents invested capital which is disappearing
constantly year by year as the machine in which it is in-
vested wears out. Furthermore, it costs money to run that
crane — money for interest on the investment required for
its installation, for power to run the crane, for the man who
operates it. Some of this cost accumulates night and day,
whether the crane is running or is idle; some accrues only
when it is in operation. But it accrues, and we must charge
it against our product somehow and get it returned to us
with profit. Evidently, though, it would be unfair to levy
any of it against our lighter lines of manufacture, which do
not need crane service and never use it. On the other
hand, here is a little industrial railway used for moving
light and medium-weight pieces around the shop. This is
an expense item of similar sort, but here the burden is not
chargeable against heavy product.

Here we have burden limited in distribution by weight or
character of product.

We enter the lathe department and find a foreman in
charge. His wages are paid him every week and enter

THE NATURE OF EXPENSE 93

into the total of our manufacturing costs, but they do not
appear on the job tickets for any of the individual items
of work handled on the lathes. His wages, also, then,
must be taken care of in the manufacturing-expense burden;
but they are incurred in connection only with the lathe
work, and in justice no fraction of them should be attached
to any of our manufactured product which has not had lathe
work done upon it.

Here we have burden limited in distribution by the char-
acter of operation.

As we pass through the shops, we notice here and there
a timekeeper at work, securing data as to the times when
jobs had been begun or finished, and here as we approach
the offices is a room where several clerks are entering the
time records and computing premiums or bonuses. Evi-
dently this is a necessary auxiliary to our productive system,
although it is itself unproductive. The cost of the employ-
ment of these clerks and of attendant expenses must go into
our burden; what particular fraction of it is theoretically
attached to any particular machine we manufacture and
sell, obviously should depend upon the complexity of that
machine — the number of parts, and hence of operations
and times, which had to be recorded, and the demands its
computations and calculations make upon the time and
services of the time clerks. Here we have burden varying
according to the complexity of the product. Next, if we
look into the sales office (as we should do) we shall see
a probably large and expensive force of men, with the aid
of considerable outlay for office assistants, advertising, and
publicity work. The total of this expense — of this com-
mercial burden — must be taken care of, and if we look
into it we shall probably find that the necessity for these
expenses varies very widely between different lines of our
manufacture. Standard product disposed of through
dealers probably almost sells itself. Special business, or

94 PRINCIPLES OF INDUSTRIAL ENGINEERING

new business for which the market must be created, prob-
ably costs a great deal to work up. Here we have burden
varying according to commercial conditions.

It will be apparent from the view we have had so far
that no absolute, mathematically correct and invariably
true distribution of expense can be made. We must ac-
cept some reasonably fair distribution that will serve within
allowable limits of error under ordinary fluctuations in busi-
ness, and we must give separate and careful attention to
extraordinary conditions that may make our methods and
figures, temporarily at least, inaccurate. The methods
generally used are more or less rough-and-ready approxima-
tions, convenient to use, sometimes as misleading as they
are convenient, but often quite good enough for practical
purposes, especially as the experienced industrial manager
has a sort of sixth sense, or specially trained common-sense,
by which he corrects the occasional false readings of his
cost system.

These methods will be outlined in the following chapter.1

1 A very thorough discussion of this subject will be found in " The
Distribution of Expense Burden," by A. Hamilton Church ; The Engineer-
ing Magazine.

DISTRIBUTION OF EXPENSE

CHAPTER VI

DISTRIBUTION OF EXPENSE

ONE underlying idea appears in all the methods of ex-
pense distribution or apportionment that are com-
monly employed. It is this : Expense, as has been re-
peatedly pointed out, does not naturally connect itself
with individual jobs or individual units of product. It
gathers like one general cloud over the whole business, but
not in distinct wreaths around each transaction. Material
and direct labor, however, do, from the beginning, identify
themselves with individual operations or individual units
of product. You can almost see each job, as it goes through,
attach to itself successive items of material and of work.
You can see each man and each machine putting material
and work together, in visible and measurable quantities,
until each piece of product is completed. Now, the under-
lying idea of all methods of expense distribution or appor-
tionment is to use some one or more of these visible, tangible,
measurable elements as a gauge, and to pro-rate the ex-
pense allotment by it. That is, they burden each job or
each unit of product in proportion to the material that
goes into it, or the wages paid for it, or the time spent
working on it, or the use it makes of the machines and
other facilities in the factory. This gives us five cardinal
methods of expense distribution : By material, by percentage
on wages, by man hours, by machine rates, and by produc-
tion factors. We will take up their operation and their
characteristics successively.

Distribution of expense by material is a method of
limited applicability. Its usefulness is confined to com-

97

98 PRINCIPLES OF INDUSTRIAL ENGINEERING

paratively simple industries such as metallurgical or
structural-material works, where the product is nearly or
quite uniform. In a brick yard, or a blast-furnace plant,
or a gas works or perhaps in a pipe foundry or other
establishments of like character, it may work as well as
any other plan, simply because there is no need of distribu-
tion, properly speaking, but only of equal sub-division.
Indeed, if the product of a plant is absolutely homogeneous

— all just alike — it makes no difference whether you ap-
portion expense by count or weight or measure or flat cost

— you can not get wrong as between one unit and another.
An expense rate per ton or per thousand is quite sufficient
for purposes of estimating or for comparison between one
period and another. But when the product is not all alike,
the introduction of material into expense-distribution calcula-
tions only confuses and distorts results. In the remaining
methods, therefore, we shall hear no more of material or
value of material.

The percentage-on-wages method of apportioning factory
expense is probably the most generally used. As a start-
ing point in this method, we take the total for a given time
(say a month or a year) first of the wages of the productive
labor during that period, and second of the factory expense
during the same period, and we find what is the percentage
relation of the expense to these wages paid to productive
labor. Suppose we find that the total factory expense is
60 per cent of the direct labor payroll; then we load every
job done during the period with 60 cents additional for
each dollar of direct wages that is expended upon it. If
we find, for instance, that a certain small steam pump is
shown by the job ticket to have cost $50 for material and
$100 for labor, we add 60 per cent of $100, or another
$60, for the factory burden, and obtain as the shop cost of
the product $50 plus $100 plus $60 equals $210.

If our output is all substantially of the one general class,

DISTRIBUTION OF EXPENSE 99

and if the various machines, tools, or pieces of apparatus
in our manufacturing plant are not very different one from
another as to expense of operation, and if our wages are
fairly uniform as between one operative and another, the
results obtained by this method will be quite accurate. But
if we have a great difference in equipment, having some
very smr/ll machines taking little room and power, and
cheaply operated, and some very large machines taking up
a great deal of room and power, and involving large ex-
pense for operation and wages; if we have passing through
the shop some very heavy work and some very small and
light work; if some of our labor is highly paid and some is
very cheap — this method may lead to very inaccurate re-
sults. A job of fitting, taking 50 cents worth of a man's
time on a little bench lathe, tucked away in an otherwise
useless corner, would be burdened just .the same as a job
taking 50 cents worth of a man's time on a huge costly
boring mill, occupying the whole end of a building; for the
percentage-on-wages method recognizes only the one visible
factor of money paid for human labor and ignores differences
in the extent to which different items of product make use
of mechanical equipment. As a large proportion of the
expense burden arises from the cost of installing and re-
pairing machinery, and moving product to and from the
machines, we can not arrive at true results by a method of
averaging that allows no weight to this particular factor.

The third method is the man-hour plan. It varies from
the preceding system in that the distribution is made pro-
portionate to the time worked on each job instead of to the
money paid for that time. At the first glance this might
seem like the same thing, but on further consideration it
will become evident that there are important differences.
For example, suppose we take a job away from a $3-a-day
man, and give it experimentally to a good clever $i.5<>a-
day helper who completes it in the same number of hours

100 PRINCIPLES OF INDUSTRIAL ENGINEERING

that his predecessor did. Under the man-hour plan it will
still carry the same expense burden as it did before, be-
cause it takes the same time. This is a correct result, for
the mere change of operative has not changed in any way
the demand which the work makes upon the general organi-
zation and facilities of the plant; has not changed in any
way the amount of expense it creates, and hence should not
change the expense apportioned to it. But under the per-
centage-on-wages plan, as we saw a few moments ago, the
expense burden distributed to this job would have been
cut in half by the mere fact that the man who did it was a
$1.50 man instead of a $3 man. Suppose, on the other hand,
the $1.50 man proves clumsy and inexpert, and takes twice as
long as the $3 man did to finish the job. Under the man-
hour plan the job would be burdened twice as heavily for
expense — as it ought to be, since it has been twice as long
occupying floor space, occupying space on the machines, tak-
ing the attention of foreman and timekeepers to look after
the bungling job. Under the percentage-on-wages method,
as we saw, this slow job, done by the cheap man, clogging
up the shop and delaying the progress of other work, would
be charged with just the same expense burden as the job
done in half the time by the competent man, because the
total wages were the same in both cases.

In some particulars, therefore, the man-hour plan is more
correct than the percentage-on-wages plan, but when we
look a little further we find that, like the percentage-on-
wages plan, it takes no cognizance of the machine element.
All jobs taking two hours are burdened the same, whether
the two hours' time is on a valve-seat grinder or on the
largest engine-bed planer in the shop.

The machine-hour method of expense distribution makes
a much closer approach to accuracy than either of those so
far described, because it recognizes the fact that in modern
manufacturing the producing unit is not a single individual,

DISTRIBUTION OF EXPENSE IOI

but a complex combination of the machine or piece of ap-
paratus, the man or men tending this machine, the equipment
surrounding the machine, and the suitably prepared space
necessary for the installation and operation of the machine.
In further explanation of this method of expense distribu-
tion the term " machine " is used in a general sense, with
the understanding that it includes anything from a soap
kettle to a jeweler's lathe.

In the administration of the machine-hour method of
apportioning factory expense, the preliminary step is to de-
termine on an hourly basis the cost of running each machine
in the works. This cost includes the charge for rental,
lighting and heating of the space the machine occupies, and
the surrounding space necessary for its operation; interest
on the cost of the machine and allowance for repairs and
depreciation; cost of power to run the machine; cost of
services, such as cranage and transportation of various
kinds to feed or to remove materials; cost of indirect labor
attendant upon the machine; any incidental or special ex-
penses; and a just proportion of the general burden of
administration, superintendence, non-productive factory
labor, etc.

Having obtained the totals of these various charges for
a month or a year, they are divided by the number of hours
during that time the machine can be expected to run, this
figure being reached by a careful study of past experience,
and if necessary corrected by later actual observation. The
quotient is the hourly rate of that machine. Every job
coming to the machine is then assessed with this charge for
the number of hours or fraction of an hour it spends on
the machine.

Evidently, if each machine in the plant is thus rated,
and each job coming to each machine is thus assessed with
its individual expense burden, and if all the machines are
in operation during the normal and expected portion of

102 PRINCIPLES OF INDUSTRIAL ENGINEERING

the time, the whole expense burden would be distributed in
close accordance with the use each job has made of the
facilities of the shop. This seems as fair a basis as could
be found. The trouble begins when the activity of the
plant differs largely from normal. The machine rates then
distribute too much or not enough to cover the actual ex-
pense, according as the plant is running overfull or is partly
idle. This, however, is the unavoidable difficulty caused
by the inherent nature of expense, as pointed out at the
beginning of this study. When too much expense is thus
charged against the jobs of an active period it may be al-
lowed to go as a reserve to be drawn upon in a sub-normal
period, or it may be credited back to the operations of that
period pro rata. When too little is charged, the undis-
tributed expense remains to be apportioned by what Mr.
Church calls a " supplementary rate," either on an hourly
basis or in the same proportion as the original machine rate.1

There is another perplexity in the use of machine rates
which need not be discussed at length here, but should be
noted in passing because of the active discussion it excites
amongst accountants. Suppose a small job, which comes
along when its regular machines are all full, is done for
convenience's sake on a heavy and expensive machine that
might perhaps otherwise have stood idle; this normally in-
expensive little job is charged under these peculiar circum-
stances with the high machine-hour rate, corresponding to
the expensive machine on which it was accidentally done.
The result is that its cost appears abnormally high. If used
as an estimate for further transactions this cost would lead
to distorted results. Yet if it is not used, the rigid account-
ant says, we are doctoring our records and taking costs not
as they were, but as we thought they ought to have been.

This is what is known as the problem of the penalized
job. It is somewhat academic, and we will not go into

1 " The Distribution of Expense Burden."

DISTRIBUTION OF EXPENSE 103

it further than to point out that if the case arises very often
in the practice of any plant, it suggests some inefficiency in
the balance of the equipment which may be remedied by
proper changes.

Expense distribution by production factors is an extension
or development of the machine-rate method influenced by a
new way of looking at the whole process of production. The
central idea of it, as developed by its sponsor, Mr. A. Ham-
ilton Church,1 is that manufacturing is carried on by a com-
bination of what this authority calls " services," of which
labor is but one. On account of its vitality and visibility,
labor (in Mr. Church's view) has been given undue promi-
nence and placed by itself as if it were the only direct factor
and standard t>y which everything else is measured, while
the various other services have been dumped into the ex-
pense account which is afterwards redistributed by some
method of approximation or average or percentage on labor,
as we have just seen.

Mr. Church's production-factor method proposes to re-
store these various services to separate individual recognition.
In place of the heterogeneous general expense account, he
would keep separate accounts with every identifiable factor
of service other than labor, and then he would apportion
these separate factor accounts separately, each by a logical
method representing its actual relation to the various lines
of manufacture carried on. The principal of these services
or production factors other than labor are Land and Build-
ings, Lighting Heating and Ventilation, Power, Stores and
Transport, Organization, Management and Supervision.
These are distributed by various methods of apportionment,
Mr. Church's test question being always : " How would a
manufacturer pay for this service if (as might be the case
with light or power or land and buildings) he purchased or

1 " Production Factors in Cost Accounting and Works Management," by
A. Hamilton Church; The Engineering Magazine.

104 PRINCIPLES OF INDUSTRIAL ENGINEERING

hired it from an outside source instead of mingling the supply
of it with his own characteristic function as mere man-
ufacturer?" Thus, the expense attendant on the provi-
sion of land and buildings, or of light, heating and ventila-
tion, is distributed on the basis of square feet or square
yards of floor space, or, to use Mr. Church's term, on " ca-
pacity-area "; power is distributed by horse-power years or
horse-power hours; stores and transport are assessed depart-
mentally, with consideration of the weight, bulk, activity of
movement, and other matters affecting the actual cost of
storage and movement of materials. These separately dis-
tributed rates are then combined into hourly rates applying
to various so-called " production centers," a production cen-
ter being a machine, a group of machines, an individual
work bench, an area of floor space, or any distinct element
in the process of manufacture; these hourly production-cen-
ter rates are then imposed on individual jobs, as these jobs
in their progress employ the time of the different produc-
tion centers.

The system evidently demands elaborate preliminary
study, but when the production-center rates have once been
determined the application thereafter would be no more in-
tricate than that of the machine-hour rate, which is in prac-
tical and highly satisfactory use. So far as I know, the
complete production-factor method of expense distribution is
not yet in service anywhere. It would produce, as Mr.
Church points out, one highly valuable result — that intel-
ligent comparison of costs in different establishments could
be made and the quantitative effect of, say, expensive power
in one locality, high rent in another, over-elaborate organi-
zation in the third, and so on, would become instructively
apparent. At present it is rarely possible to contrast costs
in different establishments with any effective practical re-
sult, or at least with any clear discovery as to why they vary,

DISTRIBUTION OF EXPENSE 105

or just what points are more efficient in one than in the
other.

Of all the expense-distribution systems outlined, the ma-
chine rate probably best combines practical workability and
a reasonable approach to mathematical correctness. It is
not as scientific as the production-factor method, but it is
much more within the comprehension of many industrial man-
agers and within the powers of the average industrial ac-
counting staff. When it is used the machines are often
grouped into classes and class rates are determined instead
of individual rates for each and every machine. Probably
only progressive managers will go even as far as this; but
this far they will go, and have gone, and the method is in
every-day use and has been in use . for years in some im-
portant establishments. Most plants, however, will still re-
fuse to consider anything but the percentage-on-wages or the
man-hour plans. Either of these can be made fairly correct
for ordinary purposes, even with diversified product, if this
product is classified into homogeneous groups, and an ap-
propriate percentage apportioned to each group, corre-
sponding generally to its relative expense-creating charac-
teristics.

So much for factory burden.

The treatment of the general expense presents substan-
tially the same sort of problem as the distribution of fac-
tory expense, but the elements composing it are not as many
nor as complex, and hence the process is not as intricate.
The principal components of general expense are corre-
spondence, advertising and other forms of publicity, sell-
ing, collecting, accounting, and office administration. The
principal danger against which accountants generally have
to be warned is that of assuming that the scale used in dis-
tributing factory expense may be used also for general ex-
pense. There is no necessary relation whatever between

106 PRINCIPLES OF INDUSTRIAL ENGINEERING

them; that is, there is no necessary correspondence be-
tween the proportionate expense of making an article and
of selling it. A sufficiently satisfactory method of dis-
tributing general expense is what might be termed an ap-
portionment by inspection : That is, we take our principal
classes of product which in one line of business might be
bank vaults, safes, and steel furniture, or in another line of
business might be chain blocks, locks, and architectural iron
work. We next take our principal general-expense ac-
counts, which may be correspondence, catalogues, general
advertising, salesmen's salaries or commissions, and travel-
ing expenses. We decide from the general characteristics
and circumstances what proportion of each of these accounts
is fairly chargeable to each line of product. And finally we
reduce the resultant totals to a percentage basis. This is not
a scientific mode of solution. No mode of scientific solu-
tion is possible. The element of judgment enters largely
into our analysis and distribution of the various accounts —
but, as Mr. Church says, " there is a great difference between
judgment and mere guesswork," and by taking the various
items of expense in detail we arrive at a result immensely
more valuable than any that could be reached by guessing at
the whole lump of expense.

The expense accounts we have been discussing, although
they appeared to be indirectly connected with individual
units of product, nevertheless have been actual accounts,
sums of money positively and visibly expended. There is,
however, another element in the cost of manufacture closely
associated with expense (so closely that I have not hereto-
fore referred to it) and yet characterized by qualities quite
distinctively its own — qualities which differentiate it from
expense and suggest the need of a different mode of treat-
ment. This last element of cost is depreciation. Deprecia-
tion is the decrease in value of our property, that is, espe-
cially our buildings, machinery, and equipment, by the fact

DISTRIBUTION OF EXPENSE 107

that it is growing older and is drawing nearer the time when
it will be worn out, or when through some change of condi-
tions, processes or methods it will become obsolete, and will
have to be discarded, scrapped and replaced by something
new. We must therefore anticipate this inevitable depreci-
ation by estimating in our costs, and recovering from our
sales, a reserve fund, thus accumulating in advance a fund
from which the depreciated equipment may be replaced.
Our cost must include not only the material and the labor
that have actually gone into the product, plus a share of the
expense burden actually incurred. It must include further
a factor for something that has not yet happened, or at least
has not yet materialized in the form of an expenditure in-
curred and recorded on our books. We must provide for
the depreciation which is going on day by day, even though
it may not make itself evident for a long time to come, or
until the wear and tear have grown serious enough to re-
quire overhauling or replacing of the depreciated item.

In reckoning the allowance to be made for depreciation,
we have not only the same difficulties that we have in the case
of expense,- — that is, the difficulty of apportioning an indi-
rect account to direct classes or items of product — but we
have the additional problem of determining what amount we
must thus apportion.

We have seen that authorities differ in their treatment of
the expense account. They differ more widely and aggres-
sively yet over depreciation. Some treat it rather curtly, al-
most with indifference, maintaining that where repairs and
renewals are consistently kept up, depreciation need be rec-
ognized only by comparison of annual inventories and the
use of such averaged figures as may be thus disclosed. At
the other extreme, some accountants argue fiercely that de-
preciation should be assumed at an arbitrary percentage of
the value of our equipment, and they split hairs in the debate
whether this percentage should be taken always on the orig-

IO8 PRINCIPLES OF INDUSTRIAL ENGINEERING

inal investment, or each succeeding year on the investment
as reduced by preceding deductions.1

It is a proposition upon which it is perhaps impossible to
generalize except perhaps to this extent:

First, that it is very dangerous to regard investment in
short-lived equipment (such as small tools, for example) as
a plant account — a part of our fixed capital — at all; it
should be considered an expense and so charged at once, or
if carried as an asset should be given only a nominal value.

Second, that items of intermediate permanency such as
drawings, patterns, should be credited as an asset only at a
fraction of the cost and a very high factor of depreciation
should be applied to them year by year until they are
charged off and disappear.

Third, that as to the permanent items such as machinery,
apparatus, power-plant, heavy tools, structures, etc., the
chief danger to the continuance of their value is not so much
that they may be destroyed by wear and tear as that they
may be superseded by some new and radical development.
Suppose we are building large reciprocating steam engines:
Our costly drawings, patterns, templates and equipment for
a great horizontal and vertical compound type may be made
obsolete in a year or two by the introduction of the steam
turbine. Suppose we are operating a cable-road: our
power-plant may have to be scrapped to put in electric trac-
tion. Suppose we own a bicycle factory: it may be thrown
into idleness because the popular whim turns to tennis and
golf. Suppose we are prosperous manufacturers of tin-
plates in Wales: our mills may be closed by the Dingley
tariff in the United States. Suppose we are proprietors of
a machine-shop : it may have to be remodelled throughout
and largely re-equipped for electric driving and the use of
high-speed steel. In some of these cases, even, it might be

1 A standard work on depreciation is " The Depreciation of Factories,
and their Valuation," by Ewing Matheson; E. & F. N. Spon.

DISTRIBUTION OF EXPENSE 109

argued that the renewal expense should not be charged
against the profits of the past as a depreciation, but rather
as a new investment justified by the larger profits obtain-
able in the future through the improvement. Others might
be held to be " risks of the business " rather than cases of
depreciation. If we are to provide for such contingencies
by a factor of depreciation, depreciation becomes to a cer-
tain extent a sort of insurance against an indeterminable
risk. It is prudent to provide for it; to consider that cer-
tain future expense not yet visible is yet inevitable; to assess
a provision for it as a part of our calculated costs, and to
set aside a corresponding share of our current receipts as a
reserve fund to meet the contingency. But what the factor
should be in any given case I think can be determined only
by the method of inspection and the exercise of deliberate
and intelligent common-sense.

There is, however, a certain ethical consideration, as
pointed out by Prof. L. S. Randolph,1 which should not be
overlooked when a rate of allowance for depreciation is de-
termined. It is this: In industrial and corporate undertak-
ings generally there are usually at least two classes of owner-
ship interests, typically represented by the bondholder and
the stockholder. The bondholder lends capital on the se-
curity of the actual physical property. In view of this
security he lends the money at a comparatively low rate of
interest, looking to this physical property for the ultimate
return of his principal. The stockholder seeks his return
from the profits of the business and generally expects to re-
ceive a higher rate of interest. He owns the business, sub-
ject only to the lien given to the bondholders for the bor-
rowed capital. He manages the business. Its success is
proportionate to his skill and ability and all surplus earn-
ings accrue to him.

Now if in calculating and distributing his profits the
1 The Engineering Magazine, August, 1910.

110 PRINCIPLES OF INDUSTRIAL ENGINEERING

stockholder does not make proper provision for restoring
wear and tear, replacing worn-out equipment, and main-
taining the value of the plant, which is the bondholder's se-
curity, he is not keeping up the value that he has pledged
against the money borrowed from the bondholders. He is
not dealing fairly with his creditors.

If, on the other hand, the stockholder set aside an un-
necessarily large proportion of his gross earnings for a de-
preciation fund, thereby diminishing his apparent net profits
or his surplus available for dividends, this fund nevertheless
remains in his hands for administration and need be drawn
upon only so far as actual depreciation occurs, the remain-
der reverting to the stockholder, so that he does himself no
wrong. This is, in other words, an argument for a high
rather than a low depreciation allowance.

Clearly, the distribution we have been talking of is all
retrospective. It shows us the dollars and cents of what we
have done. This is very important, but it is even more im-
portant to know what we can do in the future. In other
words, the gift of prophecy is often more valuable
than the knowledge of history. Therefore the chief
object of putting history into this form is to make
it effective for prophecy — that is, for determining the
cost of new product, estimating the cost of new work,
and directing the expansion of business along the most
profitable channels. And beyond that, figures of cost in-
telligently prepared and analyzed serve as true guides show-
ing exactly where our losses, wastes, and inefficiencies occur,
revealing changes or irregularities requiring investigation,
and calling as loudly as figures can call for the reforms and
economies that will make our output larger, better, or lower
in cost of production. The real purpose of cost finding is
cost reduction.

LABOR. THE PRIMARY WAGE SYSTEMS

CHAPTER VII
LABOR. THE PRIMARY WAGE SYSTEMS

LABOR represents the most interesting, the most diffi-
cult, and probably the best studied part of works man-
agement — and yet the part which is furthest from finality.
This is because it has to deal not with a pas-
sive " party of the second part," such as we have
to consider in material and machinery, but with human
ambitions, hopes, fears, and prejudices — in short; with
" the other fellow.'1 Until the race reaches the end of its
evolution we shall never reach the end of the labor problem.
Labor may of itself be the largest element entering into
manufacturing costs, and therefore may deserve per se the
largest measure of attention because of its intrinsic impor-
tance; but even when it is relatively one of the smaller fac-
tors in the equation, it may have immense potentiality in af-
fecting the values of the others which appear intrinsically
larger. It may, so to speak, be not a separate quantity in
the equation, prefixed by a plus or minus sign, but a co-effi-
cient or even an exponent, affecting the value of an intrin-
sically much larger quantity. A man whose wages are 30
cents an hour may control the operation of a machine
which, for interest on its first cost, maintenance, depreciation,
floor space, and stand-by losses, represents a fixed charge of
$3 an hour. If the man is slow in his movements, and takes
an hour and a half to do a job which he should finish in an
hour, the important loss is not the 15 cents in wages for the
man's time, but the $1.50 for the machine's time. If his
work is badly laid out so that he waits 15 minutes between
jobs, the important loss is not the 7^ cents paid him for his

114 PRINCIPLES OF INDUSTRIAL ENGINEERING

time of idleness, but the 75 cents loss through the idleness
of the machine. Or, again, the $3 a day man may work half
a day on a piece worth $15 and by carelessness or incom-
petency may spoil the job. The important loss is not the
$1.50 paid in wages for which we get no return, but the $15
for the material destr9yed. In many classes of manufacture
the investment in general plant and mechanical equipment,
and the fixed charges for power and transmission, main-
tenance, superintendence, management, etc., make what is
called the " overhead burden " a larger tax than the pay-
roll; in such a case it may be a wise policy to stimulate pro-
duction by an increase in wages more than proportionate to
the increase of output, because we shall recoup our extra
wages expense by the reduction of the burden resting upon
each unit or product. To be more specific: Suppose we
are turning out 100 machines a day, our daily labor bill be-
ing $500, the cost of our material another $500, and our
general expense $1,500 per day. The cost of each machine
is then 500 plus 500 plus $1,500, divided by 100, equals $25.
Suppose next, by doubling their wages we can spur our men
on to such zeal that they turn out 150 machines a day. We
are paying 100 per cent more for labor and getting only 50
per cent more product. Nevertheless, our total cost of
$1,000 for labor, $750 for material, plus $1,500 for fixed
expense, equals but $3,250, and when this is divided up
among 150 machines the cost of each is shown to be only
$21.67. We have reduced our total manufacturing cost
$3-33 °n each unit, or about i2l/2 per cent. And, in addi-
tion, by the increased output we have secured another ad-
vantage; that is, the more rapid turnover of our invested
capital.

The general principle involved is this: Material cost and
labor cost per unit of product naturally vary directly with
the number of units we manufacture; but expense costs are,
in a very large proportion at least, invariable. They remain

PRIMARY WAGE SYSTEMS 115

just the same whether the amount of product we turn out is
large or small. If we turn out but few units the expense
cost of each, therefore, becomes great. If we turn out a
great many units the expense cost of each becomes very
small. We can therefore often, and indeed almost always,
well afford to increase the wages cost per unit, if by so doing
we can stimulate the workers to turn out a large volume of
work and so cut down the expense cost per unit. The sav-
ing in expense cost compensates the manufacturer for the in-
crease of wages cost. The increase of wages compensates
the workman for his extra effort. This is the fundamental
idea underlying the advanced wage systems. It is quite
simple, but failure to understand it and realize its impor-
tance has been the cause of most of the resistance to the intro-
duction of these systems and to many of the labor troubles
between employers and employees.

At the root of the whole thing, as already pointed out,
is the fact that the enormous expansion of the manufacturing
system made it difficult to maintain individual relations be-
tween the employer and the individual workman. The
conditions were defined somewhat fully in the second chapter
but the argument may be summarized again here. There
was first the mere difficulty of numbers — the collection of
hundreds and thousands of men in one establishment or one
organization; the identity of the workman and the effi-
ciency of his work was lost sight of in the crowd. There
was next the tendency to specialization, under which the in-
dividual worker seldom turns out any complete article, but
only performs some part of the process or operation, pass-
ing the work on then to the next specialist, who performs
the next operation, so that it becomes still more difficult to
pick out and identify the work of any one man. Thirdly,
there is the tendency to standardization, under which the
individual worker does not put much of his own thought or
his own skill into the job, but simply repeats mechanically a

Il6 PRINCIPLES OF INDUSTRIAL ENGINEERING

routine marked out by the patterns or the more or less auto-
matic machines and the detailed instructions provided for
him by the thought of somebody else. The almost over-
powering influence of these tendencies is to weld workmen
into classes and to substitute dealing with a class for dealing
with an individual. And when this happens without the bal-
ancing influence of any other principle, the next inevitable
step is that the inducement to individual efficiency disap-
pears. Under ordinary conditions it is a very small and
very uncertain profit for a workman at the bench, in the
ditch, on the wall, to work harder and better than his
fellows. He is not noticed and he gets no reward. There-
fore, as Mr. Gantt has so ably pointed out,1 the next nec-
essary consequence is that the man of more than usual abil-
ity, finding that he can not make anything by putting that
ability into his work, turns his ability to agitation. He sees
that he is treated as a member of a class and can get no more
than the ruling wages paid to that class; so he endeavors to
enlist the whole class in getting those ruling wages raised.
Trade unions have been occupied chiefly with efforts to raise
wages or to shorten hours because it was only by united
action that the individuals composing the union could get
more. If the scheme of employment and payment for work
done were so adjusted that a good worker would automatic-
ally be singled out, rated according to his performance, and
paid according to his ability, the energetic workers would be
much less interested in strikes for higher wages regardless of
efficiency. The trade unions would not go out of existence
by any means, but they would find other and, as it would
eventually prove, economically better matters to which to
turn their attention.

The advanced wage systems are all efforts, earnest and
conscientious efforts, to provide a natural and automatic
means for paying the able workman in accordance with his
1 Work, Wages and Profits. The Engineering Magazine.

PRIMARY WAGE SYSTEMS 117

ability, while they protect the less efficient workman in at
least the standard wages of his class. That is, they do not
undertake altogether to break up the class system, but to
enable any man who is superior to the average to rise above
it. They are all based upon some sort of a combination of
two elementary ideas of paying men for services rendered.
These two ideas are day pay and piece rate. Fundamen-
tally, these are the only two methods of wage payment.

Under day pay a man is paid for the length of time he
works, regardless of the amount of work he may do during
that time.

Under piece rates the man is paid for the amount of
work he does, regardless of the time it takes him to do it.

If I hire a man to shovel sand at $1.50 for ten hours, that
is day pay. If I hire him to put a load of coal into my cel-
lar at 15 cents a ton, that is piece rate. If I hire a stone
mason at $4 a day for eight hours, that is day pay. If I
agree with him to build me a wall at $1.25 a perch, that is
piece rate. Under the one system you pay a man according
to the length of time he is in your employment, and under
the other system you pay according to the amount he does
for you. In the bonus system, the premium system, the
efficiency system, and all the others which we shall shortly
take up in detail, these two elementary ideas are somehow
blended; but blending ideas is something like blending col-
ors; the result is not like either of the elementary colors you
started with, and mixtures of the same two colors in differ-
ent proportions are unlike one another. So each of the va-
rious wage systems has its own individual color, so to speak;
and as certain colors are pleasing to some eyes and other
colors pleasing to other eyes, so certain wage systems are
pleasing to certain minds and others more pleasing to other
minds.

Let us now take up the several wage systems in order, be-
ginning with that which is probably the oldest, if indeed it

Il8 PRINCIPLES OF INDUSTRIAL ENGINEERING

was not originally the only, method of paying for labor.
This is the method of day pay. It is indeed so old and so
deep-rooted that one is almost tempted to say that if we go
back to the source of things it is the only wage method; for
when piece rates are fixed you will always find that, con-
sciously or unconsciously, the employer and the workman
both compare in their minds the piece rate proposed with the
time they think the job is going to take, so that it seems to
come down, after all, to the question not what is the job
worth, but what is the time that it takes to do the job worth?
Now the conception underlying day pay is that a certain
sum of money is arithmetically equal to a certain number of
hours spent by a man — any man — at doing a certain kind
of work. For example, every man digging dirt is worth
$1.50 for ten hours' labor; every man laying brick is worth
$5 for eight hours' labor. Stated this way, baldly and with-
out qualification, the notion seems so foolish that it is hard
to see how it ever became so generally adopted in practice.
It would be as intelligent to base an economic system on the
hypothesis that a string is always 6 feet long or that all
horses run equally fast. Nevertheless, the conception per-
sists, and will long continue to persist, and you will have to
deal with it. It is in the moral code of many labor unions as
the first and great commandment. The reason, as already
suggested, is that the unions have found it necessary to re-
sort to collective bargaining and to demand a universal wage
rate, chiefly because there has been in general no method
practiced by employers for fair and honest individual bar-
gaining with each man according to his ability. The result
of the whole thing is a struggle between opposing forces,
the employer trying to push the day wage down because he
has no satisfactory assurance of anything but minimum effi-
ciency on the part of his workmen, and therefore he wants
to pay the minimum price; and the men trying to force the
rate up because they can not get it up in any way except by

PRIMARY WAGE SYSTEMS 1 19

force. This sort of struggle is constantly going on, with
variable results. Where labor is abundant or poorly organ-
ized, and where the employer or sub-bosses have a genius
for driving, probably as highly efficient results are secured
under the day-wage plan as under any other ; that is, the em-
ployer gets as high a product for the dollar he expends as he
can get by any method. Where labor is powerful and well
organized and much in demand, the results secured under the
day-wage system are perhaps as inefficient, and as little re-
turn is obtained for each dollar expended, as in any applica-
tion of capital to productive or constructive work, except,
perhaps, in deliberately dishonest political jobs.

Nevertheless, the day wage remains to-day the method of
payment for a very large proportion, perhaps a large ma-
jority, of all service. I have dwelt strongly upon its un-
favorable features, but of course they are to a certain extent,
even if imperfectly, remedied in practice. The extremely
good man cannot be held down, and he will break through
even the dead level of day pay ; so the fallacy of assuming that
all men are equally worth $1.50 a day is corrected fractionally
by picking out here and there a peculiarly able man and mak-
ing him a job boss or a sub-foreman at $2 or $2.50, while
the hopelessly incapable fellow is fired off the job and gets no
wages at all. The plan as a whole is one of those rough
and ready ones that the world has always used and always
will use. And k does express, although it expresses it badly,
a certain vital truth; that is, that time, after all, is the one
supreme value that must be seized and used moment by mo-
ment or it is lost forever. If machinery is idle the oppor-
tunity may usefully be taken to overhaul and repair it; if
material is idle it may be worked over into something else
which is active; if dollars are idle they are only dormant and
will come to life and into circulation as soon as there is an
opportunity. But if hours are idle they are dead and gone
forever. This truth of the fundamental value of time is

120 PRINCIPLES OF INDUSTRIAL ENGINEERING

recognized by the day-pay system. You will find the system
in use everywhere and you will have to get along with it;
nevertheless, in most cases a much more intelligent plan for
hiring time than the day-wages plan can be devised and may
be applicable.

Perhaps the first deliberate effort in this direction was the
establishment of piece rates in place of day pay. By these
rates the unit of adjustment as between employer and em-
ployee is not so much time spent at labor, but so much work
completed. The unit task may be of the most diverse kind
in different occupations — a ton of coal mined, a locomotive
mile run, a yard of cloth woven, a casting made, a certain
area of type set, a face shaved or a head of hair cut. The
fundamental idea of day pay is that of mathematical equiva-
lence between money and time; the fundamental idea of piece
work is that of mathematical equivalence between money and
jobs.

If, for example, I am working as a journeyman hat-
maker 1 at day wages, I tacitly accept the truth of the
proposition that ten hours of my time are worth, say, $2.
That is, I agree with my employer upon the truth of this
equation :

(A) 10 hours time=$2.oo

I come into the shop at 7, go home at 6, with an hour for
lunch. I loaf as much as I dare; the boss watches me and
drives me as much as he can, and perhaps in the average I
make about one hat a day. Now suppose I go on to piece
work. I set in the background the proposition " ten hours
equals $2," and base my creed on the tenet that u making one
hat equals $2." In other words, my employer and I fix
our eyes on a new equation :

(B) Making one hat=$2.oo

1 It is scarcely necessary to say that the supposition is taken at ran-
dom, for illustration only, and does not in the least reflect actual con-
ditions in the hat-making industry.

PRIMARY WAGE SYSTEMS 121

The longer I dawdle, the longer it takes me to get that
$2. On the other hand, if I work fast I can perhaps get
through by mid-afternoon or even earlier and go fishing.
Or if I choose to stay I can begin on another hat. Very
possibly by diligence and study I can improve the tools or
the operations a little, or I may carry on the making of two
hats at once, working on each during necessary pauses for
the maturing of processes on the other ; and I may soon be
turning out three hats in two days or even two hats in one
day. The boss will be paying me 50 per cent to 100 per
cent more wages in a given time than he did formerly. Yet
his hats are costing him no more. Indeed, they are costing
him less, for his general expenses for shop rent, light, heat,
superintendence (that " overhead burden " of which we
have already spoken) are no greater than they were before,
and yet he is turning out more hats to absorb these charges.
A smaller fraction of this cost, therefore, attaches to each
hat.

Now I said that in going on to piece rates the boss and I
both set in the background the proposition that ten hours
equal $2. I used those particular words advisedly, be-
cause that idea at best is only retired. It is not dismissed.
It lurks in the background of our minds persistently. The
price of $2 per hat was fixed as a piece rate not because we
really believed it was worth $2 to make a hat, but because
on the average that paid me $2 for a day's time. In other
words, we accepted formula (B) not because we believed
in its abstract truth, but because we believed this :

(C) Making one hat=io hours time.

As soon as (C) proves untrue, (B) no longer follows
from (A) and my employer at least loses faith in it. When
I begin to get $3 a day the boss begins to get uneasy, and
when I make $4 a day he is probably certain that some-
thing is wrong. He believes no journeyman's time is worth

122 PRINCIPLES OF INDUSTRIAL ENGINEERING

$4 a day. The fact that he is turning out larger product
from his shop in the same time at less cost does not impress
him as it should, while the $4 a day to a " $2 man " looks
enormous. He begins to believe that he is paying too
much for the making of a hat. Probably he decides that
if two hats can be made in one day, the making of a hat
is not worth more than $i, and he cuts my piece rate in
half. I have to work twice as hard as I did before and
get no more for it. On the other side, my fellow workmen
are displeased. They are contented with the old order and
want to work along turning out about one hat a day and
getting $2 for the day's time. They say " if you show
the boss that two hats can be made in a day, he will think
that we are all a worthless lazy lot, and he will want to
drive us up to your pitch or get rid of us. You are killing
the job." So these two influences combine to discourage
me against the great and apparently fortunate incentive
which first led me to rejoice in the piece rate and to see so
much apparent advantage in it.

Piece-rate payment is an old idea. We find it far back
in the history of the guilds, and no doubt it existed centuries
before that. Within comparatively recent times, however,
it has been brought into new prominence through the earnest
efforts of men who saw in it a great light to lighten the
way out of the darkness of day wages. It offered an in-
centive to the worker, a reward proportioned to his skill
and industry, an enlarged output induced by this financially-
stimulated activity, and the very essential result of increased
volume of manufacture with decreased cost of product from
the same plant investment. Results — important results
— have been secured; but yet they have frequently been
disappointingly below expectations, chiefly for the reasons
suggested in my little parable of the hat-maker.

The great inherent trouble is the difficulty (under ordi-
nary or non-scientific management) of fixing piece prices

PRIMARY WAGE SYSTEMS 123

which are fair and which continue to be fair. The reserve
capacity which a workman may be holding back, consciously
or unconsciously, in an operation that has not been scien-
tifically studied and standardized, is almost unforetellable.
When it is realized under the incentive of piece payment,
and his earnings rise enormously, the disposition of the
wage payer to rebel against the outlay and to cut down
the piece price is almost irresistible. If the employer sees
that a workman can do several times as much as he was
doing under day wages, you can hardly blame him for feel-
ing that he has been defrauded all along under the old
system, and for trying to make things more even from his
point of view. But the price-cutting that has so very, very
often followed soon after unscientific price-setting has
worked immense mischief, by raising in the minds of the
men suspicion and distrust of systems introduced to replace
the old day-wage plan. Union opposition has been strong
against piece rates, and while it has been modified in many
places so as to admit piece work, this acceptance has often
been accompanied by counter-restrictions which nullify most
of the possible advantage — as, for example, the fixation of
a very moderate number of pieces as the maximum that
any man may make in a day, thereby coming back substan-
tially to day wages.

The trouble here, however, is not so much one of principle
as one of administration; but there is a fault of principle
inherent in piece rates, and that is that they put all the
uncertainties of production on the workmen. Suppose a
man is machining steel castings at so much per piece. He
may have delivered to him a lot of hard metal parts that
take four or five times the expected time to finish. For
that period, at least, he can not make living wages. Sup-
pose a gang is unloading coal cars at so much per ton, and
the switching crew is tardy in moving away empties and
setting in loaded cars, and so keeps them idle for consider-

124 PRINCIPLES OF INDUSTRIAL ENGINEERING

able periods, or suppose that in setting in the new cars
it places them badly so that the men have an extra long
throw and work at a disadvantage. Again, the workmen
may be unable to make fair wages, through no fault of their
own. Suppose, once more, a working gang is made up by
the foreman so that green men are mixed with skilled, and
these green men by their awkwardness cut down the out-
put of the whole gang. Here, again, if they are working
at piece rates, their earnings are reduced without their fault.

In all such cases, unless there is special intervention by
someone in authority to make up the loss, it falls upon the
piece-rate worker. Under day pay, of course, it would be
the employer who would suffer in such cases; but the em-
ployer is in the first place better able to stand the loss. The
unprofitable item of work is probably only one of many
he has in hand, while to the workman it is the worker's
entire interest; and last, and most important, the whole
power to remove the conditions that caused the loss rested
with the employer and not with the workman.

Notwithstanding these certain defects of principle and
administration, however, piece rates are a good deal used.
Where the rates are carefully and fairly set, by fair and
frank effort on the part of both employer and employee
to make them right, and where they are fairly maintained
after they have been set, they are often (almost usually)
preferred by the men; for they make the man more the
master of his own time, and they enable the capable work-
man to increase his earnings in correspondence with his
ability and capacity. Where the men will work fairly under
the piece rates they are liked by employers also because
the system stimulates larger production from the same plant
without materially increasing the indirect operating ex-
penses. These are the advantages of the piece-rate sys-
tem — increased output and increased earnings. • Its dis-
advantages are that when difficulties interfere with output

PRIMARY WAGE SYSTEMS 125

the men's loss is not made up to them without special action
by the employer ; 1 and, worst of all, that when the em-
ployees* earnings are very much increased the employer can
seldom resist the temptation to cut the rate. Knowing this,
the men are frequently suspicious and seldom let themselves
out to anything like their real capacity.

The " contract plan " of employing and paying labor is
used to some extent, especially in heavy machine-shops, that
is, locomotive and shipbuilding plants, in the United States
and Great Britain. It is not, however, a separate and dis-
tinct system, but is substantially a gang piece rate. An
over-all price for a job is agreed upon with the contractor,
who uses the equipment and facilities of the employing shop,
but hires his own workers and assistants on terms arranged
between him and them. As discipline and responsibility
thus fall chiefly on the contractor, while the tools, facilities
and general environment are largely supplied by the shop,
the plan leads to a somewhat demoralizing divorce of au-
thority and liability. It is likely to lead, and in practice
it does lead, to very bad industrial conditions. Neverthe-
less, it has been in use for a long time, and remains in use,
and hence must be considered a practical and to an extent
commercially successful method, although the success is not
determined by very high standards.

And now, having noted the principle characteristics of
the two fundamental methods of wage payment — day pay
and piece pay — we come to the systems which I have called
" advanced " ; that is, the special systems designed to correct
or to reduce greatly the evils of the straight day wage and
the straight piece rate. The principal of these are the
Halsey premium plan, the Taylor differential piece rate,
the Gantt bonus system, and the Emerson efficiency or in-

1 The objection is inseparable from the straight piece-rate system. It
is, however, removed by the " piece-rate with guaranteed day wages,"
which is becoming well-known, especially in railway shops.

126 PRINCIPLES OF INDUSTRIAL ENGINEERING

dividual-effort system. They are placed in this order for
reasons that will appear as we go on. And the Halsey
premium plan is placed first because it is simply and only
a wage system, while the others are rather parts of philoso-
phies and methods of handling labor in which the wage
system is only one element.

The Halsey premium plan 1 bears the strong impress of
intimate familiarity with the shop — of complete knowledge
of the traditions of the shop, the suspicions of the shop
men, and the weaknesses of shop managers; and it seems
to be marked further by a conviction of the strength of
these long-established institutions and by a tenderness to-
ward disturbing or offending them. It is, in short, a char-
acteristically well-informed effort to get good results, to
bring about better conditions, without making any trouble.

The essence of the Halsey premium system is to pay men
the established day wage under any circumstances, and then
to reward them further by a voluntary extra payment if
they do better than the established record of past perform-
ances. When the system is introduced there is no necessary
or conspicuous change from the way things have always
been done. Every man gets his regular day wages on pay
day exactly as before. But by reference to past records,
standard times are set for the various operations upon
which the workmen are engaged. In setting these stand-
ard times some allowance may be made for the probable
shortening of the old records under the incentive the pre-
mium system is going to offer; but in the main the controlling
consideration is, how long did the job take on the average
when it was done by good workmen in the past? These
standard times are tabulated, recorded in the office for ref-
erence, and the times taken by the men day by day in doing

1 " The Premium Plan of Paying for Labor," by F. A. Halsey; Trans.
Am. Soc. M. E., June, 1891.

PRIMARY WAGE SYSTEMS 127

these same jobs, or performing the same operations, are
compared with these standards. When any man shortens
the standard time on any job after the plan has been put
in force, he is credited with a premium, which is equal to
his wages at his regular hourly rate for a portion of the
time he saved on the job. This portion is usually either
30 or 50 per cent of the time saved. The idea of grant-
ing only part of the saved time to the workman is twofold.
First, he uses the shop facilities harder — uses more power,
wears out more tools, etc., and so the shop should have
part of the gain; second, as the employer thus profits as
well as the man, he is less likely to be tempted to cut rates
when the time is a good deal shortened.

Premium earnings are kept separate or may be kept sep-
arate from the regular payroll and enclosed in separate
pay envelopes. Their acceptance by the men is wholly
voluntary. The workman can take his premium or leave
it ; but he usually takes it — if not at first — when the ac-
cumulation begins to look tempting. It is, however, plain
that the introduction of the system raises no issue which
could well be a basis of a strike, as the introduction of piece
rates into the day-work shop might do. It does not abolish
old conditions and introduce new ones, which must be ac-
cepted whether they are liked or not. It simply offers a
new, non-compulsory opportunity for the men to earn more
money if they choose, without any arbitrary or even neces-
sary imposition of a forced rate of working. Furthermore,
the calculation of the premium is the simplest sort of a sum
in elementary arithmetic. The standard times are posted.
The workman can keep a record of his own times. All
he has to do is to find by subtraction how much time he
has saved, take one-half of it or 30 per cent of it, as the
case may be, and he knows his own premium at once. On
account of its simplicity and its conciliatory characteristics,

128 PRINCIPLES OF INDUSTRIAL ENGINEERING

probably, the Halsey premium plan is in use in a larger
number of shops than any other of the advanced wage
systems.

Halsey puts no upper limit on a workman's earnings.
However much the man's skill and ingenuity may shorten
the times he gets his regular proportion of the gain. One
objection sometimes raised to the plan is that as the times
are not scientifically set (that is, as the operations are not
scientifically studied and figured down to the shortest prac-
ticable time), they may sometimes prove to be very much in
error against the shop, and the discovery that they are and
that the men in consequence are making very high premiums
may tempt the employer to cut them down, something in
the same way as piece rates are so often cut down.

James Rowan, a member of a prominent firm of engine
builders in Glasgow, has put forth a modification of the
premium plan, generally known as the Rowan premium,
which has as one of its principal objects the protection of
the shop against such mistakes as are referred to in the
preceding paragraph. The fundamental principle of the
Rowan premium plan is that under no circumstances can the
workman make more than double his regular day wages.
Under the Rowan system the time saved is converted into
a percentage of the standard time. The workman then re-
ceives, as a premium, this same percentage of the time he
actually took. Another way of defining the Rowan premium
takes the form of the equation :

Time saved ~.

— ; X 1 inie taken = Premium.

Time set

The system is regarded with a good deal of favor in Eng-
land, but it is not much used in the United States. It pays
the workman more largely than the Halsey plan for the
earlier (and easier) savings, but as the base upon which
the premium is calculated shrinks constantly as time is saved,
the man's profit from large savings of time decreases pro-

PRIMARY WAGE SYSTEMS 129

portionately. The actual premium is the same at 90 per
cent time saved as at 10 per cent. There are some other
special modifications of the premium plan in use, but it is
not important to include them here.

LABOR. PHILOSOPHIES OF MANAGEMENT

CHAPTER VIII
LABOR. PHILOSOPHIES OF MANAGEMENT

PROCEEDING now from the wage systems which are
merely modes of payment — that is, which do not go
beyond the concept of enlisting the workman's interest
through the medium of his compensation — we come to an-
other group of methods in which the manner of payment
is only one feature of a policy of management, embodying
many other ideas and principles.

Prominent among these as one of the early and very
widely noticed applications of the ideas upon which other
systems of very different philosophy have been built, is the
Taylor differential piece rate.1 More than thirty years ago,
at the Bethlehem Steel Works, Frederick W. Taylor began
a development of the conception that labor of all kinds,
operations of all kinds, could be scientifically studied and
analyzed and reduced to elementary processes; that these
elementary processes could each be performed in some one
best way, discoverable by an expert investigator; that there
was a minimum of time in which each could be continuously
performed by a good workman ; that the workman could be
taught to do each elementary operation, and hence the en-
tire job, in the best way and the minimum time; and that
the payment of a considerably larger price for work done
according to the standard than for work that failed to
reach the standard would secure the co-operation of the em-
ployee and induce him to put forth his best effort.

The Taylor system is no longer followed at South

1 " A Piece- Rate System," by Fred W. Taylor ; Trans. Am. Soc. M. E.,
June, 1895.

133

134 PRINCIPLES OF INDUSTRIAL ENGINEERING

Bethlehem but its data are so important on account of the
influence they have exerted on later practitioners that they
deserve more careful attention than the number of actual
instances of the use of the system would seem to suggest.

Taylor begins, then, by an ultimate analysis of the job
into its elements. Each of these elements is then subjected
to thorough expert study to determine the methods and ap-
pliances by which a man working steadily at a pace he can
maintain without injury can reach maximum performance
and minimum time. The workman is then provided with
everything necessary to accomplish, in the standard time,
the results determined by this study, and he is thoroughly
instructed in every step of the operation by minutely de-
tailed written schedules and by expert advisers.

Finally, he is paid at piece rates which are set at two dif-
ferent levels — a low price per piece if the workman fails
to do the job in the standard time, and a high price per
piece if he does it in the standard time. This is the so-
called differential rate. The successful worker is paid not
only for the more pieces he turns out, but he is also paid
more for each piece. The unsuccessful worker not only
makes less pieces to be paid for, but is paid less for each
piece of the smaller number he makes. The money gain
to the man who attains standard performance thus becomes
very large.

For example, suppose a standard performance for a cer-
tain repetitive job is set at ten pieces completed per day.
The piece rate may then be fixed at 30 cents each if stand-
ard time is attained and only 25 cents a piece if it is not.
The workman who finishes only nine pieces in a day re-
ceives but 25 cents each, or a total of $2.25. The work-
man who finishes the ten pieces set as a standard receives
30 cents each or a total of $3. For an increase of only
1 1 per cent in production he gains an increase of 33 1-3
per cent in wages. This large incentive is provided to en-

PHILOSOPHIES OF LABOR MANAGEMENT 135

list the co-operation of the workman — to make him con-
tribute his part to the effort which was begun by the man-
agement in their study of conditions and their provision
of the equipment and the instruction which would enable
the man to turn out a large volume of product. Under the
Taylor system, however, it is not intended to leave within
the workman's power much more than this co-operation.
That is, it is not intended to rely upon the workman to
originate betterments in practice, at least until he has ac-
cepted all the betterments contemplated *by the investigators
and instructors. This is a sharp distinction from the Halsey
system. Halsey relies almost entirely upon the workman's
knowledge of his job, the workman's intimate acquaintance
with shop conditions, tools and the details of the operation
to perform this operation better and more quickly when
the incentive of additional pay is provided. Taylor, by a
minute time study and a carefully elaborated scheme of
operations, manipulations and methods, purposes to super-
sede the workman's knowledge — to cancel, as it were, the
workman's personal equation. In principle, there is no
objection to the workman turning out as large an excess
over the standard output as he can. In practice it is not in-
tended to leave him any large margin of capacity for doing
better than the standard. And, like the ordinary piece
rate, if a man does not reach standard his wages drop.
There is no minimum wage assured.

The bonus plan worked out by H. L. Gantt,1 an associ-
ate of Mr. Taylor, has rather more elasticity and has
found highly successful application. Like Taylor, Gantt
begins with standardization of conditions and accurate time
study. That is, he makes it possible for the man to work
fast, and decides as nearly as possible just how fast the man

!"Task and Bonus," by H. L. Gantt; Trans. Am. Soc. M. K, 1901.
For a much fuller argument see " Work, Wages and Profits," by H. L.
Gantt ; The Engineering Magazine.

136 PRINCIPLES OF INDUSTRIAL ENGINEERING

should work. The initial engagement of the workman,
however, is on a day-pay basis. The workman is sure of
regular day wages as a minimum.1 Under the Taylor piece
rate, or any piece rate, the minimum as well as the maximum
depends on the number of pieces made. If a man is unlucky
and does not finish even one piece he gets nothing. Under
the Gantt system he gets day wages however little he may
produce. The computations for extra or bonus payment
thereafter are on the basis of time. To use Mr. Gantt's
own words:

" Under this system each man has his work assigned to
him in the form of a task to be done, by a prescribed method,
with definite appliances, and to be completed within a cer-
tain time. The task is based on a detailed investigation by
a trained expert of the best method of doing the work; and
the task setter, or his assistant, acts as an instructor to
teach the workmen to do the work in the manner and time
specified. If the work is done within the time allowed by
the expert, and is up to the standard for quality, the
workman receives extra compensation (usually 20 to 50
per cent of the time allowed) in addition to his day's pay.
If it is not done in the time set, or is not up to the standard
for quality, the workman receives his day's pay only.

"The system is thus in effect a combination of the day-
rate and piece-work systems. While learning to do his
task the workman is on a day rate ; when he has learned to
do it the compensation for the task is a fixed quantity, really
equivalent to piece rate. The method of payment, then,
is day rate for the unskilled and piece work for the skilled."

The Gantt system produces the true piece-rate result that
a workman receives full pay at the bonus rate for all the

1 This seems much like the " piece rate with guaranteed day wages,"
referred to in a preceding note. One difference is that if the "task" is
changed, it is a change of time and not an immediate change of price,
and the effect on the men is much more favorable.

PHILOSOPHIES OF LABOR MANAGEMENT 137

time he saves. He does not divide the time saved with the
shop as he does under the premium plan.

Gantt, like Halsey, puts no limitations — that is, no
arbitrary, or, as we might say, official limitation — on the
amount a man may earn. He does not set any maximum,
as Rowan does, on the theory that a workman should not
be permitted to make more than a certain scale of wages.
But Gantt does in substance set a natural limit to maximum
earnings by putting the task limit so high that even the most
skillful and energetic man could not greatly exceed it. He
does this deliberately, because in the first place, when con-
ditions are scientifically adjusted to eliminate the ordinary
chances and mischances of haphazard working, and when
operations are scientifically laid out and the time it takes to
do them is scientifically studied, and when men are carefully
instructed in performing the operations in the manner thus
scientifically studied out, the performances of normally
capable individuals ought not to and will not vary very
widely from the determined standard.

For instance, if 100 men of average physique, taken at
random, were required to run 100 yards in their ordinary
clothing and under ordinary conditions of preparation and
amid ordinary surroundings of street travel, the results
would probably vary by many hundred per cent, because not
only of the varying fitness of the men, but of the varying
obstacles and delays they would meet. But if you should
take the same hundred men, train them for six months, put
them on a standard running track, in regular running cos-
tume, you would probably find that most of them would do
the hundred yards in times varying not more than 50 per
cent and probably not more than 20 per cent. This is the
kind of standardizing Gantt's preparatory measures are
designed to accomplish.

And in the second place, it is part of Gantt's theory that
no large reserve capacity (that is, capacity of surpassing

138 PRINCIPLES OF INDUSTRIAL ENGINEERING

standard task) should be left to the workman, for fear
that if he does very greatly better the prescribed perform-
ance, and so very greatly increase his earnings, the employer
will be tempted to cut wages and so will destroy the whole
scheme. This danger is avoided if the bonus task is set so
high that no workman unless he is a living phenomenon can
better it by at the utmost 50 per cent.

Like the differential piece rate, the Gantt bonus system
is characterized by a sort of critical point at which the wages
received by the worker rise suddenly on arrival at a certain
volume of production. The effect of the Gantt bonus as
a stimulus to the workman is something like that of offering
a big, shining prize to every man who jumps up a high step.
The prize seeker either lands or he fails. There is no half
success possible. The total result of such a tournament,
if there are entries enough, would be the collection of an
athletic body of high jumpers on the upper step, while the
field would be left below.

Applying the same simile to the Halsey premium plan,
we might say that it offers the workers on the lower level
an inclined plane up which to climb, with prizes for every
one who climbs at all, infinitesimally graduated in direct
proportion to the distance climbed. The natural result of
such a tournament is a graded classification of moderate
athletes, whose performances range all the way from the
record holder to the tail ender. And there is also a natural
tendency for the crowd to thin out toward the upper levels,
because as a man climbs each step becomes harder, and yet
the premium for the last step is no greater than the premium
for the first.

The illustration just used is not intended to suggest the
slightest disparagement of either the theory or practice of
the task and bonus system. Under Gantt's direction of it,
the most careful, thoughtful, and skillful instruction and
assistance toward accomplishing the task is given to the

PHILOSOPHIES OF LABOR MANAGEMENT 139

operative. To the utmost possible degree, all obstacles to
achievement are removed. Those who can not succeed at
one task* are given every opportunity to try some other for
which perhaps they may be better fitted. Those who do
succeed are unquestionably greatly benefited, both phys-
ically and financially. Nevertheless, for any given work the
system is largely selective, discovering the fully fit (who are
generally a minority) and shifting the unfit (who are gen-
erally a majority) to other occupations.

Because Halsey and Gantt both grant day wages as a
minimum and add something more if a man exceeds stand-
ard performance, there is an unfortunately general but ill-
informed impression that the systems are much alike.
Psychologically — that is, in their interpretation of and
appeal to human emotions — they are almost diametrically
unlike. They seek similar results (an increase of produc-
tion) and they offer a similar reward (pay for time saved)
but by contradictory policies. Halsey is so desirous
not to " stir up things " that he scarcely lets the men know
that times are being studied. Gantt is so desirous to make
large output possible that he would make most radical and
far-reaching changes if necessary to remove causes of in-
efficiency. Halsey relies entirely on the workman's ability
to find ways of shortening the standard time. Gantt
analyzes each job scientifically, resolves it into its elements,
determines the best way and the minimum time for per-
forming each, and will not even let a workman try to earn
bonus until the man has been thoroughly instructed by an
expert. Halsey abhors the idea of setting any " task " as
the limit a man must reach. Gantt glories in the " task "
as a stimulus to effort, and makes such a task the goal a man
must reach before bonus begins. Halsey tempts the man
on by at least a small premium for even a trifling gain in the
time used. Gantt gives no bonus until the very large gain
necessary to reach his task limit has been made, and then

140 PRINCIPLES OF INDUSTRIAL ENGINEERING

he gives a great big bonus — 25 per cent or 50 per cent
all at once.

Halsey avoids class distinctions by making the passage
from day-wage earnings only to premium earnings a progress
of insensible gradations. Gantt emphasizes class distinction
not only by the sharp and wide break between day wages
and bonus earning, but also by encouraging outward signs
and symbols of bonus earning — encouraging the group of
bonus workers and the creation of a bonus society, entry
into which is a desirable goal for those who are still in the
no-bonus class.

These things are really more important in dealing with
men than questions of 20 per cent, or 30 per cent, or 50
per cent premium ; and in these things the philosophies of
Gantt and Halsey take widely different and opposing views.

The Emerson efficiency or individual-effort system 1 has
certain resemblances to both the Halsey premium and the
Gantt bonus plans. It recognizes that there is truth in the
psychology of both these systems, different as they are
psychologically, and it recognizes advantages in both their
methods. Nevertheless, although it has these resemblances
it proceeds by a philosophy and a plan of its own", which is
distinct and characteristic.

To begin with, it establishes the regular daily-wage scale
and system as the basis of employment, thus agreeing with
both Halsey and Gantt. Next, it prescribes the standard
of production after scientific study, and offers a rather large
bonus for reaching it, thus agreeing with Gantt; but it leads
up to this bonus reward by a graduated scale of smaller
bonuses, thus approaching the Halsey premium plan.

To take up its features in greater detail, let us go back
to the measures preliminary to the introduction of the sys-

1 " A Rational Basis for Wages," by Harrington Emerson ; Trans. Am.
Soc. M. E., June, 1904. Also " Efficiency as a Basis for Operation and
Wages " ; The Engineering Magazine.

PHILOSOPHIES OF LABOR MANAGEMENT 141

tern. As in the case of the Taylor and Gantt policies al-
ready described, the arrangement, equipment, and working
conditions in the shop or factory are standardized to secure
the utmost efficiency and to prevent all wastes and losses that
are preventable. Standard times for every operation are
then determined and scheduled by the most careful study.
In setting these times Emerson apparently gives more weight
to averaged past experience than Taylor or Gantt, but is
not so closely governed by it as Halsey. Taylor and Gantt,
indeed, are inclined to proceed without much regard to what
has been the practice in any particular case. They go back
to the very best way of doing the thing, and having de-
termined this scientifically for every element, they add these
elementary operation times together, allow a certain factor
for what might be called the human equation — that is,
a margin by which the workman may be permitted to fall
short of perfection — add perhaps another factor for im-
perfection of materials, and so arrive at a final result.
Halsey is disposed to make good existing shop practice the
standard and not to go very far back of that in setting stand-
ard times, but to rely largely on the skill and effort of the
individual workman for finding ways of bettering the old
records. Emerson's policy inclines rather to the method
of taking such records as Halsey would accept as standards,
and refining down by deducting for the preventable wastes
and losses that have been occurring and that are to be elimi-
nated by the improvements installed. This method, as will
be seen, goes upon the supposition that if you take practice
as it is, and correct it for all the errors and inefficiencies you
can discover and identify, the residue will be automatically
self-corrected with such inherent, necessary, and unprevent-
able inefficiencies and wastes as are innate in conditions and
undiscoverable by inspection.

Under the efficiency system, if a workman finishes a job
or an operation in the standard time which has been fixed,

142 PRINCIPLES OF INDUSTRIAL ENGINEERING

he receives a bonus of 20 per cent. This rate is about the
same as the lower limit usually adopted by Gantt. The
Emerson bonus for standard performance, however, is al-
ways 20 per cent, while Gantt varies somewhat with the
agreeableness or disagreeableness of the work, occasionally
running as high as 50 per cent and probably averaging
from 30 to 40. Under the efficiency plan, however, if the
workman reaches two-thirds of the standard performance
(that is, if he finishes the job in one and a half times the
standard time) he reaches a point beyond which he begins
to receive a little extra reward, increasing gradually like the
Halsey premium. This reward, however, instead of rising
at a uniform rate as the Halsey premium does, rises on a
sliding scale. It rises, in fact, as a function of a parabola,
the performance being measured along the curve and the
bonus being apportioned according to the ordinate. This
makes the bonus very small indeed for the early savings of
time below time and a half. It merges into the 20 per cent
bonus at standard performance. For still further reductions
of time, that is, for doing the work in less than standard time
set, the workman gets the 20 per cent bonus, plus all the
time that he saves.

In the practical use of the system, the individual bonuses
are usually calculated for each man's work for a period of
one month. His efficiency for that entire time is reduced
to a percentage by dividing the times allowed by the times
taken. For instance, taking a single job as an example,
if a man takes 90 minutes to do a job standardized at 60
minutes, his efficiency is 60 divided by 90, or 66 2-3 per
cent. If he takes 60 minutes to do a job standardized at
60 minutes his efficiency is 60 divided by 60, or 100 per
cent. If he takes only 40 minutes to do a job standardized
at 60, his efficiency is 60 divided by 40, or 150 per cent. As
already explained, however, it is characteristic of the
Emerson efficiency system that the efficiency is not calcu-

PHILOSOPHIES OF LABOR MANAGEMENT 143

lated job by job, but on the sum of all the work done during
the bonus period, which, as already explained, is usually one
month. Two important results are thus secured. The
first is that elaborately accurate timekeeping is not neces-
sary for wage purposes, although quite apart from this it
may be desired for cost-keeping purposes. All the pay-
master needs is a list of the jobs each man did during the
bonus period. He takes off, from the standardized sched-
ule of operations, the standard times allowed for these jobs,
adds them together, and divides these total standard hours
by the total of the wage hours the man actually worked.
The result gives him the man's efficiency percentage for
bonus calculation. He looks in his standard table for the
bonus corresponding to that efficiency and adds it to the
man's regular wages. The first result, then, is that minute
time-taking is not essential. The second result is that un-
less a man maintains good efficiency on all jobs his bonus is
automatically cut down. Suppose, working repetitively at
a job standardized at 60 minutes, a man should spurt for
two hours at a 4O-minute gait, and then should loaf for
eight hours at a i2O-minute gait, he would finish in 600
minutes only seven jobs standardized in total at 420 min-
utes. His efficiency would be 420 divided by 600, or 70
per cent. His bonus would practically disappear. He
would still get his day wages, of course, just as he would
under the Gantt plan or the Halsey plan; but under the
Halsey premium he would, and under the Gantt system he
might, be awarded bonus for the three quick jobs, although
on the whole he was not a profitable man to the shop. It
is not uncommon, where the premium system is in force, for
men to beat the shop in this way by earning a good pre-
mium through an energetic spurt and then loafing along
at day wages for some time afterwards. This disposition
is automatically met by the efficiency plan. Gantt provides
for it to a considerable extent by offering a secondary bonus ;

144

PRINCIPLES OF INDUSTRIAL ENGINEERING

for example, a bonus to the foreman if every man under
him makes bonus, or a second bonus to the worker who
makes bonus every day in the week.

A peculiar point in the efficiency system is that the bonus
begins at 66 2-3 per cent efficiency. The awards for the
earlier and easier savings of time, however, are very small.
At 67 per cent efficiency the bonus is i-ioo of i per cent
of a man's wages. It does not become i per cent of his
wages until he reaches 74 per cent efficiency. At 77 per
cent efficiency the bonus is 2 per cent of wages; at 83 per
cent it is 5 per cent of his wages; at 90 per cent efficiency, 10
per cent of wages; and at 100 per cent efficiency, 20 per cent
of wages. The full table is given below :

CO

c/3

CO

CO

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^j

CJ

i

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>> c

CJ <U

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>> C

U QJ

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o< 55

t I

£ to

£ g

§, S*

C {-'

c o

^

c w

^

C y

^

CO

t>

CO

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C/5

'S fc

§ 8

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O Q^

C 8

•S 53

§ 8

•« J-i

CJ Q^

§ 8

q~* O*

O ,4

^C ^

O _;

^C ^

o •

(^ OH

o •

W

w

w

pq ^

w

pq j^

67

.0001

78

.0238

88

.0832

99

.1881

68

.0004

79

.0280

89

.0911

IOO

.20

69

.0011

80

.0327

90

.0991

101

.21

70

.0022

81

.0378

91

.1074

IO2

.22

71

.0037

82

.0433

92

.1162

103

•23

72

•0055

83

.0492

93

.1256

105

.25

73

.0076

84

•0553

94

• 1352

no

•30

74

.OIO2

85

.0617

95

•1453

1 20

.40

75

.0131

86

.0684

96

• 1557

130

•50

76

.0164

87

.0756

97

.1662

135

•55

77

.0199

87-5

.0794

98

.1770

140

.60

To go back to a simile already used, if Gantt invites the
men to jump and Halsey coaxes them up an inclined plane,
we might say that Emerson shapes this plane to a gradually
increasing curve. Each man's performance is measured by
the distance he comes along the curve, while his reward is
proportioned to the vertical height he climbs. Increasing
fatigue is thus met by proportionate reward for each suc-
cessive effort. The normal result is the training of a num-

PHILOSOPHIES OF LABOR MANAGEMENT 145

her of men with graduated records, as under the Halsey
plan, but with a tendency to collect the denser crowd near
the top, with the line thinning out as you go down the scale
to the smaller and poorer performances.

Omitting minor variations which are of limited interest,
the systems we have now reviewed comprise all the well
recognized and distinctly formulated wage systems properly
speaking. There are, however, certain other policies of
handling labor without particular stress on the method of
paying wages which have many strong and interesting char-
acteristics and are worthy of notice, even in an elementary
review.

The first of these is connected with the name of Frank B.
Gilbreth,1 a disciple and adherent of the Taylor doctrine,
whose methods have been developed and applied chiefly in
connection with building and general contracting. Gilbreth
maintains that not even " time study " is the limit of ele-
mentary scientific analysis — that back of that is " motion
study." His best known work has been in the simplifica-
tion of building operations by very skillful and very inter-
esting eliminations of traditional but needless wastes of ef-
fort or method. His practice in handling labor is
characterized by four major principles : First, the separation
of the work so that, as far as can possibly be managed,
each man works separately and individually — that is, so
that his separate individual performance can be distinguished
and measured. Second, constant observation by a sufficient
force of timekeepers to record individual performance from
hour to hour. Third, conspicuous and immediate posting
of these records so that comparison between man and man,
or, if unavoidable, between gang and gang, can be made
every shift, if not indeed every hour. Fourth, reward of

1 His principal publications descriptive of his methods are " Brick-Lay-
ing System," Myron C. Clark ; " Field System," the same ; " Motion
Study," D. Van Nostrand Co.

146 PRINCIPLES OF INDUSTRIAL ENGINEERING

some kind (and experience shows that it may be of the most
varied kind so long as it is positive and conspicuous) for the
best performance or performers, and admonition for the
poorest. In brief, it depends largely upon the stimulus of
emulation, of competition, and it consists essentially in pro-
viding conditions under which emulation can work most
actively and in providing prizes, either substantial or senti-
mental, to be competed for.

The next to" be mentioned is the policy or method con-
nected with the name of Charles U. Carpenter,1 which has
the following characteristics: First, great emphasis is laid
upon a committee system, by which officials responsible for
the prosecution of the work are brought into frequent meet-
ings to report upon existing conditions and to furnish esti-
mates or commit themselves to agreement as to what can
be accomplished in the immediate future. Second, an im-
mediate record is made of these reports and undertakings,
usually on a blackboard, so that the official goes down in
black and white before his fellows, and knows that the
record will confront him at the next meeting. Third, this
system of conference and consultation, with some attendant
emulation, is carried down even to assistant foremen and
job bosses. Fourth, a system of individual reward by a
slight increase of wages or small promotion is used to en-
courage and distinguish the man who strives for and attains
more than ordinary efficiency.

Neither of these systems is as automatic in its action as the
wage systems previously described, but both aim at the same
purpose, which runs through all the methods considered —
the restoration of individuality to the workman, who has
been so largely unindividualized by the major tendencies of
the modern industrial system.

Profit-sharing is frequently spoken or thought of as if

1 For a full exposition, see his book " Profit Making in Shop and Fac-
tory Management," The Engineering Magazine.

PHILOSOPHIES OF LABOR MANAGEMENT 147

it were some sort of wage system, and is mistakenly classed
with premium and bonus plans.

It is not naturally related to these systems, either in
method of administration or in philosophy. It lacks com-
pletely the individualizing action, which, as previously urged,
is one of the fundamental qualities of the premium, bonus
and efficiency plans generally. By profit-sharing, as the
term is now used, is meant the policy of paying to labor, at
rather long intervals — usually a year, although sometimes
six months or even three months — a dividend related in
some way to the net profits of the business for the same
season. A typical instance in this country is that of the
Procter & Gamble Co. Profit-sharing has been in effect in
the Ivorydale factories for a good many years, the practice
being to pay to a selected class of the workpeople, as a
dividend, a percentage of their wages equal to the rate de-
clared on the common stock of the company. The practice
is more widely used in England than in the United States,
perhaps because the piece-rate, bonus, and premium systems,
originating here, anticipated the profit-sharing system, and
already occupied the place it might possibly otherwise have
taken.

The difference in idea and in operation scarcely needs to
be pointed out.

In the wage systems which we have already discussed,
the increased earnings are directly proportioned to the in-
creased effort of the workman, and are received promptly in
connection with his regular payment for that effort. The
connection between extra diligence and extra reward is in-
stant and obvious. If a man works hard he receives all the
benefit. If he does not gain any bonus or premium he
usually has only himself to blame. In profit-sharing, the
dividend comes after the lapse of a long period of time, and
the conditions leading up to it are more or less obscure. It
depends upon the net earnings of the business, which are

148 PRINCIPLES OF INDUSTRIAL ENGINEERING

affected by many elements, of which labor in total is only
one, and the work of any single individual is an extremely
small fraction. The man who has worked very hard may
be disappointed because losses through bad debts, errors of
business judgment, or an unforeseen change in the markets,
have cut into the profits of the concern and no net earnings
are shown. There is too much bookkeeping between the
individual worker and the company's published report, and
the man is always inclined to think that accounts are being
juggled so as to deprive him of his dividends. Lastly, the
extra payment is either divided among all employees, effi-
cient and inefficient alike, or else the employees are graded
into classes, not automatically by the inerrant justice of their
time and job records, but arbitrarily by the ruling of some
superintendent or foreman.

Profit-sharing, therefore, while it is to be respected as
an earnest attempt to harmonize labor and capital, is
not a very logical or very successful attempt. When all is
said and done, it has the air of being a sort of gratuity and
it is not properly speaking an advanced method of wage pay-
ment. The same thing seems to be true in part of the plan
for selling stock of a corporation to the employees which
seems to be finding favor nowadays. There is no neces-
sary, automatic, and manifestly just relation between an
employee's efficiency or faithfulness and his ability to save
money and invest in stocks. The most deserving man in
the company's service may have a large family, or a sick
wife, or dependent parents, and he may have to turn aside
from the opportunity to become an investor and see it go to
someone whom he knows (as perhaps only one workman
can know another) is less worthy. The plan of course
creates a body of employees whose interests are financially
interlocked with the interests of the company, and to this
extent it tends to " harmonize capital and labor," but this

PHILOSOPHIES OF LABOR MANAGEMENT 149

body is necessarily small and is not necessarily formed on
logical lines.

Before leaving the subject of labor, it is expedient to
say something upon an aspect of the treatment of labor in
industrial plants which has recently been advanced promi-
nently into public view. This is what is generally known
as betterment or welfare work, and it covers all sorts of
institutions for the hygiene, comfort, pleasure and instruc-
tion of the workers.1 These institutions are outside of con-
tract relations between employer and employee, but installed
or promoted by the employer with motives in which altruism
and enlightened selfishness are compounded in various pro-
portions. Usually it is frankly admitted that the purpose
is to provide a healthy physical and moral atmosphere in
which the employee may naturally develop his highest effi-
ciency, to make conditions so pleasant that good men will
naturally incline to remain permanently in the service rather
than to rove, and to establish a feeling of friendliness and
good will to which the employee will respond by willing
loyalty to his work and his employer.

There is great diversity in opinion as to how far work
of this kind may advantageously go. Comparatively few
years ago there was generally very great indifference on the
part of manufacturers as to the physical well-being of their
workpeople, and conditions of light, heat, ventilation and
sanitation were often completely ignored. While the newer
movement has gone to perhaps extravagant extremes in cer-
tain cases, there is no doubt whatever that it has exercised
an excellent influence in awakening shop managers to a
realization that employees should be surrounded with condi-
tions of ordinary decency and comfort at least, and that the
money so expended yields large return in improved output

1 A very large number of examples are assembled in " Social Engineer-
ing," by Dr. W. H. Tolman, McGraw-Hill Book Co.

150 PRINCIPLES OF INDUSTRIAL ENGINEERING

and quality of work. One of the ablest works managers
I ever knew used to say: " We must give the workmen a
comfortable shop, well lighted, well ventilated, warmed if
necessary to a point comfortable for physical exertion; we
must give him a place to change his clothes, to wash with
proper regard for his individual self-respect. We must
have well kept lavatories and sanitary conveniences. Why

— because we love the workman? No, but because, like
all other machines, he works best when he is kept in the
best condition." This is a very utilitarian statement, and
perhaps it expresses the lowest limit to which welfare work
should certainly go. It must be admitted that where con-
ditions of peculiar discomfort are attendant upon the work

— conditions which the employee alone is unable to remedy

— the employer may well go to considerable length in over-
coming them or in supplying offsetting comforts. I noticed
recently in a trip over the Santa Fe road l that reading and
recreation rooms at division points, especially across the
desert, were throngingly patronized by the men. The outfit
was very simple; merely a couple of rooms with plain tables
and chairs, the principal monthly and weekly magazines,
and dailies from the larger cities along the road; oppor-
tunities for playing cards, checkers or other games, and
perhaps a piano. At larger points they might have a bil-
liard table or a bowling alley. Unquestionably, in those
crude desert towns, devoid of any other wholesome interest,
the Santa Fe reading rooms were not only a strong force for
law, order, and morality, but also a great advantage in keep-
ing men from that extreme of discontentment which would
have made them a fickle and unreliable class of employees in
the service of the road.

Beyond this we might go with hesitation. There are,
however, a number of companies and corporations which

1 See "Methods of the Santa Fe," by Charles Buxton Going; The En-
gineering Magazine.

PHILOSOPHIES OF LABOR MANAGEMENT 151

have attracted wide notice by a series of provisions for com-
fort, instruction, and recreation of their workpeople both
in and out of working hours. It would be rash to claim an
ability to speak the final word on the question, but under
average American conditions, it is probably best for both
employer and employee to rest content with the lower limit
herein suggested — that is, thorough, honest, earnest at-
tention to intra-plant conditions of hygiene and safety —
accompanying a mode and scale of payment which enables
the employee to realize the largest earnings possible to his
capacity.

MATERIALS

CHAPTER IX
MATERIALS

IN a preceding chapter we assumed the manufacturer's
point of view, from which every proposition in produc-
tion is divisible into three terms: materials, labor and ex-
pense. In a more detailed examination of these three di-
visions of cost, we have reversed this order and have studied,
first, expense, then labor, and lastly we come to materials.
The reason for inverting the sequence by which the actual
things would appear in practice, is that the justifying reasons
for many of the wage-paying methods and broader indus-
trial policies become clear only after we realize clearly the
peculiar characteristics of the expense account and its shift-
ing ratio to the other costs of production — its decreasing
relative importance as the volume of production rises, and
the consequent desirability of stimulating production through
increased efficiency of labor, even at a considerable increase
of labor cost. Labor was taken up next so that the tenden-
cies of the various wage systems might be measured in the
closest possible connection with the problem of costs. We
come now to material, which, on account of its passive,
inert character, seems best able to suffer the delay and seems
also perhaps to offer less opportunities for profitable study.
Yet there is an aspect of material which we may advan-
tageously consider for the moment, with the purpose of
increasing our respect for it. If you trace almost any
material thing back to its ultimate sources, you will find that
a very large fraction of its entire value comes from the labor
that has been expended upon it. In other words, almost
all manufactured material, and even a good deal of what

155

156 PRINCIPLES OF INDUSTRIAL ENGINEERING

would be classed by manufacturers as raw material, is crys-
tallized labor.' The ore in the ground, the timber in the
forest, the seed in the soil, even the land itself, is of small
worth until the work of men's hands and brains has been
expended upon it. But at each stage of the processes through
which it passes, the labor of all the preceding stages is to
be found literally materialized and embodied permanently
in the partly finished product. What was " labor " to the
preceding workman has become " material " to the follow-
ing one.

Take the case of flax. The cost of the seed ready to
sow is largely that of the labor it took to grow it. The
crop of fibre fit for spinning adds to that the value of the
work of cultivating, pulling, threshing, retting, hetcheling;
in the spun thread a further increment of price appears, cor-
responding to the work of spinning; the woven linen is more
valuable still by the measure of the labor of the weavers
and the looms. Yet with all this " labor " accumulated in
it, the linen is " raw material " to the shirt-maker. It is so
again even more evidently perhaps with the ascending scale
of values in the materials fashioned into an engine or ma-
chine; probably a small fraction of one per cent of the market
price represents the ore in the ground from which they were
made.

By " labor " of course we understand labor of adminis-
tration and direction — labor of brain — as well as manual
effort, and we do not purpose to ignore the successive addi-
tions of profit. Making these allowances, however, if we
take the entire range of the history of almost any product
or manufacture, we shall find that direct or indirect labor
accounts for nearly all its value.

This, however, is a general argument, and, like a general
rule, it may be of no particular service in a particular case.
In any particular problem of production or industrial opera-
tion with which we are directly concerned, the relative im-

MATERIALS 157

portance of material as compared with labor or expense may
be large or may be small. We are not particularly con-
cerned with the history of the material before it came to us,
except so far, perhaps, as that may influence its quality.
We are a good deal concerned with its relative value in our
own special formula :

Materials + Labor + Expense = Manufacturing Cost.

There are enormous differences in the relative weight
these three variables assume in this formula as it is applied
to various lines of manufacture. If our business is that of
a heavy foundry or of steel structural work, materials may be
by far the most important account to us, while labor takes
a comparatively small part in our total costs. In an ordi-
nary machine shop, the expense of fuel used in the power
plant and the efficiency of the engine driving the shop may
not cut a large figure in the total result; the important con-
sideration here is to secure the highest efficiency from the
workers and from the expensive mechanical plant (that is,
from the machine and other labor) so as to turn out the
maximum product; fuel expense is but a small fraction of
the total expense burden which the product must bear. But
in a central station selling power or light, the cost and
quality of the fuel and the efficiency of the engines are of
prime importance, for coal has now become the raw ma-
terial, and the engines and boilers are the machinery turn-
ing out the product — that is, kilowatts at the switchboard
— while labor is a relatively small item. Again, if you are
furnishing insurance,1 material practically disappears as an
element of cost, and the account to which the highest and
most skilled attention must be directed is that of risk.

The point deserves emphasis. It is not merely curious

1 For purposes of emphasis, I have borrowed an illustration from James
Newton Gunn. But in strict analogy, the " Material " used by an in-
surance company is credit, and is by no means inconsiderable.

158 PRINCIPLES OF INDUSTRIAL ENGINEERING

or fantastic. It is not an idle play upon the interest of the
theme to draw illustrations from an extreme case. The very
first necessity in addressing ourselves to any problem of
works management is to get a clear analysis of the situation,
and this analysis must be not merely qualitative but quantita-
tive. We must find the absolute and the relative weights of
all the elements involved. Then, by comparison with stand-
ards, we can see clearly where the work of betterment will
yield the largest results. We can attack the thing which is
most important first, and work from the greater to the less.

Material (or as it is commonly called in shop language,
" stores " when unfinished and " stock " when finished) is
of course the central interest about which the whole organi-
zation of the plant is built up. Expensive machinery is
installed to fashion it; workmen, skilled and unskilled, are
hired to operate upon it; shop transportation systems are
provided to handle it; it is the beginning and the end of
the whole scheme of manufacture — the solid, physical
nucleus upon which added value is built up by the various
operations. It enters perhaps in crude and inexpensive
form. It moves through the factory, gathering to itself,
as it were, the values of men's time, of machine hours, of
interest on investment in plant and equipment, of skilled
superintendence and management. It emerges with all
these incorporeal values of time and work and skill, ma-
terialized and incorporated in the finished stock. The in-
crement may be one-tenth of the original cost or one
hundred times that cost; it is evidently more, for example,
in the case of the hair spring of a watch than it is in the
case of a common grate bar; but there it is, crystallized in
the completed work.

This value is rendered fluid again, so far as the plant
creating it is concerned, by sale — that is, by exchange of the
finished stock for money, with which more crude material,
time, work and skill may be purchased.

MATERIALS 159

Looked at in this way, material appears to be a matter
of great importance, not only in itself, but in its relations
to the sometimes larger elements of labor and expense. If
stock is accumulated in excess of reasonable provision, it
means at least idle capital, probable inconvenience and added
expense in the ordinary movement of work, and possibly
total loss through some change of plans, methods or pat-
terns. If stores run short 'on even one item, it may mean
stagnation to a whole group of manufactures thus left in-
complete, and it may cause forced and expensive idleness to
a whole department.

Stock, therefore, is really in a sense more important than
the money it represents, for it has more potential energy for
harm or for good. Yet it is notorious that many industrial
plants (it might almost be said most industrial plants) are
exceedingly lax in supervision and administration of the
stock department or, as it is more often called, stores de-
partment. They are strenuously careful of the dollar in
the safe, and flagrantly careless of the dollar in the stock
bins. In short, it has often been remarked that stores-
keeping is a very backward branch of works management.
It has not in general received the same careful study, the
same skillful work for betterment of efficiency, that has been
put, for example, upon the question of labor. Stores-
keeping methods are therefore likely to be found relatively
inefficient, and for this reason might afford a very interest-
ing field for study because there is more opportunity to se-
cure economically important results.

In an outline so general as this we need not go far into
the details of the subject, but we may summarize certain
principles found advantageous in systematic handling of
materials in manufacturing establishments.

Purchase is a specialized function in itself, and as we noted
in a preceding chapter is committed to a purchasing agent,
with such departmental assistance as the magnitude of the

l6o PRINCIPLES OF INDUSTRIAL ENGINEERING

business may demand. The purchasing agent does not act
on his own initiative, but on orders from the manufacturing
department, often transmitted through the stores depart-
ment. The duty of the purchasing agent is to see that
materials of the proper description are ordered from
sources that best meet the important conditions of quality,
price, and time of delivery; he must then follow up the pur-
chase order until the goods are received and quantity and
quality verified. The material passes then to the stores-
keeper, the invoices, properly certified, go to the auditor,
and the purchasing agent's duties as to that particular trans-
action are finished. The most important equipment for the
purchasing agent is thorough knowledge of the trades he has
to deal with, supplemented by systematically filed catalogues,
and authoritative information as to market quotations.

When it has been received at the works, material, as we
have already seen, passes into the custody of the stores de-
partment. The chief functions of this department are four.
First, it anticipates or meets the material wants of the fac-
tory, by securing the requisite supplies through the
purchasing agent. Second, it receives and verifies the ma-
terial when delivered, and provides for its orderly safe-
keeping. Third, it issues material as needed for the
operations of the manufacturing department and receives it
again in the finished state ready for shipment. Fourth, it
maintains exact records of every receipt and issue and of
balances remaining on hand.

In the performance of these duties an effective stores
system should accomplish at least four things :

First. It should prevent over-investment and un-
balanced accumulation. Of course, an extraordinary pur-
chase to secure advantage of special market conditions,
although leading to a temporary over-investment or
overbalance of some item of stores, might yet be very wise.

MATERIALS l6l

This is an obvious exception which common-sense would
suggest.

Second. It should give automatic warning of approach
to a minimum on any item, so that the danger may be
averted by filling up the low points.

Third. It should provide effective means for getting the
material through the factory rapidly and without delays,
even up to the final delivery 'of the finished stock.

Fourth. It should furnish records of every delivery, so
that each order can be traced and identified with the job and
with the workmen, and so that every part or piece may be
accounted for and a continuous inventory of stock on hand
may be obtainable.

It is apparent that these requirements connect the stores
department very closely with the purchasing department on
the one side, with the cost department throughout, and with
the shipping department on the other side. Under able
and energetic administration, indeed, it may be made (and
in some modern institutions it is being made) not simply
a bureau of custody and record, but a leader and a driver of
the manufacturing superintendents and the operating officers.
Even though it have no executive authority over manufac-
tures, it can and it should disclose delays, inefficiencies,
irregularities, and extravagances and bring them to the
attention of the executives for correction.

So much for the functions of the stores department. As
to its organization and conduct, also, we may define a very
few prominent features which appear to advantage in some
of the most advanced systems now in successful operation.

The first of these is the standardized listing of all standard
stores, establishing standard nomenclature for every item.
The use of symbols may be advisable, and in some cases
dimensional figures and sketches in the standard lists may be
expedient.

1 62 PRINCIPLES OF INDUSTRIAL ENGINEERING

The second is the systematic and accessible arrangement of
all stores — heavy stock, on the ground or on floors, lighter
parts in bins or on shelving. Every section or item should
be identified by a descriptive card or tag, properly displayed.

It is not essential that all material should be in one central

%

storehouse. It may be of great advantage to have heavy
stores, especially, delivered and stored near to the point of
use, and to have sub-stores where they will save the time of
long journeys to and fro with requisitions and deliveries of
stores to fill them. All the lighter and more valuable pieces,
however, should be actually and physically contained in a
store-room, and it is highly advantageous, when possible, to
have a standard arrangement so that all sub-stores repeat
the features of the main storehouse. All stores and stock
should be under the charge of a storekeeper and every is-
sue should be only upon regular requisition from proper
and responsible authority.

Third. Careful and immediate record should be made
of every withdrawal from stores and of every addition to
every item, either in stock books or other permanent forms
of record, or on the cards attached to the bins, or both, and
the stock books may advantageously follow the classification
system and arrangement of the stock bins.

Fourth. Carefully determined high and low limits
should be fixed for every item kept in stock. Their size
and range must depend, of course, on the rate at which each
item is used and the length of time necessary to get a new
supply. Provision should then be made to have a replace-
ment order put in whenever any item falls to the minimum,
so that a new supply may be bought or manufactured.
Generally speaking, when an item has fallen to a minimum,
a replacement order for the maximum quantity or a large
percentage of it is put in, the minimum being fixed at such
a point that it will last until the new lot is received, allow-
ing a reasonable margin of safety for contingencies.

MATERIALS 163

It is evident that special knowledge and talent, and skilled
knowledge and discretion, are necessary in standardizing the
elements of stores, in designing the arrangement of the
stores rooms, and in determining maximum and minimum
limits; but after that the routine becomes mechanical, and
the ordinary functions of operating the system are merely
clerical. In other words, we have here the same idea that
has already been alluded to in connection with mechanical
manufacture — the skill of the exceptional genius is perma-
nently built into the machine or system, and the routine of
the repetitive movements of that machine or system can be
supervised by the cheaper intelligence and the lower-priced
labor of the machine tender, or clerk, without fear of any
deterioration in the quality of the product.

The actual movement of material — that is, shop trans-
portation — is of course an expense account, and we met
it when we were considering the distribution of expense; the
discussion of the physical means for accomplishing such work
belongs to the study of manufacturing-plant design and shop
transportation rather than to this examination of the ele-
ments of management. The transportation of material, how-
ever, is so intimately associated with storeskeeping that it
should be noted here that very important influences on
economy may be exerted by the arrangement and the ap-
pliances adopted. In general, economy is favored by
orderly progress of material in one direction through the
works, the transportation lines of the various pieces or parts
from the stores department, through the manufacturing
operations, gradually drawing together in the order of as-
sembly. This ideal, however, becomes more and more
difficult to realize practically as our finished product be-
comes more and more complicated, and in many cases only
an approximation to the ideal can be secured.1

1 For an excellent treatment of this subject see " Industrial Plants ; their
Arrangement and Construction," by Charles Day; The Engineering Mag-
azine.

164 PRINCIPLES OF INDUSTRIAL ENGINEERING

Material and the transportation of material are further-
more very important in that they may dictate the location,
and must control the design, layout, and equipment of the
plant. To a very great extent, also, they will determine
the selection of personnel, the form of organization, and
probably the manufacturing policy.

Take, for instance, the case of a soap works. We shall
have here the problem of a converging flow of materials to
the kettle house, and from thence a stream of solid product
to the shipping platforms. Up to the point of its solidifica-
tion in the frames, our material is almost all fluid, is handled
at very little expense by pumping, and allows great elasticity
of arrangement.

Contrast with this the problem of the shipyard, which is
fundamentally putting overboard an enormously heavy unit
of product. Everything must be subservient to the location
of the shipways; our material is almost all in heavy pieces,
requiring heavy, fixed transportation systems, and the whole
scheme is extremely rigid.

If, again, we have to deal with the manufacture of type-
writers or cash registers, or some such light mechanical
product turned out largely on automatic machinery, our
problem is the accurate manufacture of enormous numbers
of very small parts, their orderly convergence to sub-centers
of assembling, and final assembling of the group parts into
the finished machine. We should doubtless install such a
manufacture in buildings of very good class, well lighted and
well equipped, to attract a desirable grade of labor, with
close communication between the various departments.

Lastly, if we are interested in powder-making, the con-
dition which dominates the whole installation is that of pos-
sible explosion, and our ideal is ,a plant widely scattered into
small units, none of them large enough to do disastrous
harm, housed in buildings so light that they can blow to

MATERIALS 165

pieces without throwing heavy fragments, and isolated by
natural or artificial barriers.

Here, then, as elsewhere in the manufacturing problem,
we see that while our purposes are fixed, the means by which
those purposes are reached must vary with each particular
case or each particular class of cases, and the first and great
essential to success is intelligent survey of our conditions,
and then the application of scientific knowledge, intelligent
methods, plain, practical common-sense to the provision of
means for meeting them.

THE END

INDEX

INDEX

Assays of cost data 4

Association; joint-stock 64

Auditor ; functions of 54

Aggregation; a result of the
introduction of

machinery 20

economic condi-
tions favoring

its increase 21

" psychologic in-

fluences favoring

its increase 22

how interlocked
with specializa-
tion and stand-
ardization 31

B

Bonus system; the Gantt 135

" the Emerson . . 142

Capital of a corporation 69

Capitalization 65

Carpenter's labor policies 146

Centralization ; see Aggrega-
tion.

Class rates 34

Collective bargaining 35, 1 18

Commercial expense 84

Commercial factor in industrial

progress 13

Competition 8

waste caused by. . 9

Constant expense 88

Contract plan of wage payment, 125
Control of a corporation; how

determined 68

Corporation; advantages of, as
a form of indus-
trial organization 69
" continuous exist-
ence of 69

" control of 68

directors of 67

169

Corporation ; holding 71

limitations of ac-
tivities of 65

management of . . 67
minority rights

in 68

" nature and legal

status of 64

stock control of. 68

" subsidiary 70

Cost as a test of industrial

operations 7

Cost department; functions of, 55

Cost diagram 83

Cost finding; chief object of., no
Cost of production ; its influ-
ence on demand 13

D

Day wages 117

Demand and supply not fixed

quantities 13

Depreciation 106

ethical aspects of, 109
rules for deter-
mining 108

Design of plant largely influ-
enced by nature of materials, 164
Differential piece rate; the

Taylor 133

Directors of a corporation.... 67

Dispatching of work 53

Distribution of expense ; im-
portance of correct 82

what it signifies 82

Distribution of general expense, 106
Distribution of shop expense.. 97
" cardinal meth-
ods of 97

" by machine

hours 100

" by man hours. 99

" by material 97

" by percentage

on wages 98

"by production
factors 103

i yo

INDEX

Dividends 7°

Domestic industries 20

Economic conditions; their im-
portance to industrial ad-
vance 12

Efficiency as an influence in

cost reduction 9

dependent on the

individual 45

how attained 10

of workers depend-
ent on hygienic con-
ditions . . . . '. 150

system, Emerson's. . 140
the Twelve Princi-
ples of 49

wages proportioned
to — would de-
crease strikes 116

Emerson efficiency system 140

Emerson's practice summarized 48

Engineering department 75

Equivalency between expendi-
ture and results 7

Executive Committee of a cor-
poration 68

Expense account ; items charged

to 85

Expense an elusive variable .... 86
constant and variable. 87
determination compli-
cated by diversity of

product 84

" fundamental problem

of 82

mathematically accu-
rate distribution im-
possible 94

method of distributing

general 105

origin and varying in-
cidence illustrated.... 91

ratio 89

subdivisions of 84

what it is 80

Expense Distribution ; cardinal
methods
of .... 97
by ma-
c h ine
rates . . 100
by man
hours . 99

Expense Distribution; by ma-
terial . . 97
by per-
c e n t-
age on
wages . 98
by pro-
duction
factors, 103

Expense-Labor 81

Expense-Material 81

Factors of production 103

Factory expense 84

Finished stores 52

Finished-stores department.... 72

Firm or Partnership 61

Fixed capital 69

Fixed expense 88

Foreman ; . deficiencies of aver-
age 44

Functional management 48

Gantt bonus system 135

General expense 84

" principal com-
ponents of. . . . 105
method of dis-
tributing 106

Gilbreth's labor policies 145

"Graphs;" their effectiveness. 4

H

Halsey premium plan, 126, 138, 139

Holding companies 71

Hygienic conditions a factor in

efficiency 150

I

Ideals; their essential function, 16
Incentive a factor of scientific

management 46, 134

Incorporation ; articles of 64

Individual efficiency not deter-
mined under ordinary man-
agement methods 34

Individual-effort system 140

Individual intelligence the
foundation of successful in-
dustry 36

Individuality; workman loses
it under manufacturing sys-
tem 34

Individual proprietorship 59

INDEX

171

Industrial Engineer; necessary

equipment of 5

Industrial Engineering defined. I
differen-
tiated
'from
other
branch-
es 3

« " has an-

alytical
and syn-
thetic
phases . 4
most
i mpor-
tant ele-
ments
of .... 5
organi-
zation;
how it
differs
from
common
type ... 46

Industrial operations; Cycle 'of, 2
Industrial ownership ; forms

of 59

Instruction of workmen a fea-
ture of scientific manage-
ment 46, 134, 138

Inventions introductory to the
manufacturing sys-
tem II

success dependent
on commercial and
economic c o n d i-

tions 12

success dependent
o n psychological

conditions 14

their influence mis-
construed 12

Job numbers 53

Jobs; disindividualizing of.... 35

Job ticket 72

Joint partnership 61

Joint-stock association 64

Labor ; cause of loss of individ-
ual relations with 115

" elementary problems of, 82

Labor ; loss of incentive to effi-
ciency of 116

proportionate influence

on costs 113

systematic handling of. 52

Labor Unions inevitable 23

their evils partly

transitory 24

Liability of individual owner.. 59
4 partner in firm.... 62
' stockholder in cor-
poration 67

Line and staff contrasted 43

Line organization 42

; defects of
ordinary, 44
45

M

Machine-hour method of ex-
pense distribution 100

Machine-hour rates; how de-
termined 101

Machinery ; aspects important

to the Industrial Engineer... 5
Machine tenders replacing me-
chanics 31

Management depends for suc-
cess o n knowl-
edge o f human

nature 15

Carpenter's poli-
cies of 146

Emerson's philos-
ophy of 48, 148

Gantt's philoso-
phy of 135

Gilbreth's policies

of 145

" of a corporation. 67
philosophies of. . 133
scientific and un-
scientific 47

task idea of. .136, 139
Taylor system

of 47, 133

Man-hour method of distribu-
ting expense 99

Manufacturing Expense 84

Manufacturing; the cycle of.. 79
Manufacturing System; factors
in de-
velop-
ment
of the, 10

172

INDEX

Manufacturing System; origin

of the, n

reflex

in fl u-

ences

of the, 19

Mass production 30

Materials 155

as a basis for ex-
pense distribution. .. 97
aspects important to
the industrial engi-
neer 6

" elementary problems

of 82

represent crystallized

labor 156

records of 52

relative importance
in the industrial

formula 157

the solid nucleus of

industrial value 158

systematic care of.. 51

162

Markets as an industrial-engi-
neering problem 6

Maximum and minimum limits

in stores keeping 162

Mechanics displaced by ma-
chine tenders 31

Methods; their importance to

the industrial engineer 6

Military organization 41

Minority rights in a corpora-
tion 68

Money as a gauge of other in-
dustrial-engineering elements, 6
Money ; supervision of 54

N

Numbering of production or-
ders and job tickets 73

0

Organization defined 41

functional 48

fundamental prin-
ciples of 41

line and staff. ... 43

military 41

th r ee-column

form of 50

what i t s effi-
ciency depends
on 41

Over-standardization ; s t a g-
nating effects of 32

Ownership; forms of indus-
trial 59

Partnership relations and re-
sponsibilities 61

special 63

Penalized job; problem of the. 102
Philosophies of Management. . 133

Piece rates 117, 120

" Taylor differential. 133
Piece-rate system ; advantages

of 124

defect of
principle in 123

» * ' " " illustration

of the
weakness

of 120

Power-plant as a factor con-
trolling size of industrial

unit 20

Premium plan ; Halsey, 126, 138, 139

Rowan 128

Principles of Efficiency ; the

Twelve 49

Production centers 104

; cost of influences

volume of demand 13
Production-Factor Method of

expense distribution 103

Production factors; how deter-
mined 103

Production order 72

Productive and non-productive

expenditures 79

Profit sharing 147

Proprietor ; rights and respon-
sibilities of the individual... 59
Psychological factor in indus-
trial development 14

Psychological Lag in industrial

advance 14

Purchasing department 51, 160

Q

Quantitative problem of works

management 39

Quick Assets 70

R
Raw stores 52

INDEX

173

Rough stores 52

Routing problems in quantity

manufacture 4°

Rowan premium plan 128

Schedules as a factor of sci-
entific management. ..46, 134, 143

Scientific Management 46

; the two
leading
schools

of 47

Selling 74

Selling expense 84

Shares of a corporation 66

Shop expense 84

Shop transportation. 163

Specialization; beginnings of.. 26
countercheck to
ill effects of. .. 33
interlocked with
aggregation and
standardization. 31

Special partnership 63

Staff and line contrasted 43

Staff organization 42

Standardization ; elementary re-
lations of 28

evil conse-
quences of... 32

general 32

in te rlocked
with aggrega-
tion and spe-
cialization ... 31

partial 29

private 32

Standards: evolution of 34

Standard times; how set under

various systems 141

Stockholders' liability 67

"Stock" in manufacture 52

Stock; sale of to employees... 148

Stock; transfer of 66

Stock tracing 52

Stores 52

" systematic arrangement

of 162

Stores department ; functions

of the 51, 73

Stores keeper; duty of the.... 51
Stores keeping; arrangement of

sub-stores .... 162
frequently i n-
eflficient 159

Stores keeping; maximum and
minimum lim-
its in 162

what an effi-
c i e n t system
should accom-
plish 160

Strikes a natural sequence of a
non-compensated class wage

rate 1 16

Subsidiary companies ; their

purpose and relations 70"

Supplementary rate in expense

distribution 102

Supply and demand a variable

ratio 13

Surplus 70

Symbolizing of stores 161

System 49

Task idea in labor manage-
ment 136, 139

Taylor differential piece rate. . 133

Taylor system 47, 134

Three-column form of organ-
ization 50

Time; irreplaceable value of.. 119

Time keeping 53

Time study 145

Tool room 54

Trade union ; see Labor Union.
Transportation of materials... 163
Trust abuses partly transitory. . 24
Trusts inevitable 23

U

Unions; see Labor Union.
Unions; why forced to strike
for higher wages 116

Variable expense 88

Visualizing industrial opera-
tions ; value of 5

Vivifying a manufacturing or-
der 71

W

Wages; contract plan 125

day 117

distribution of e x-
pense by 98

INDEX

Wages ; Emerson efficiency

system 140

Gantt bonus system. .. 135
Halsey premium plan

126, 138, 139

piece-rate 120

" possible advantages of
disproportionate i n-

crease in 114

principle involved i n

increase of 114

proportioned t o effi-
ciency would diminish
one cause of strikes.. 116

" Rowan premium plan. 128

Wages; Taylor differential

piece rate 133

Wage systems; all are combi-
nations of day
pay and piece

rates 117

; what is sought
by advanced. . 116

Welfare work 149

Work dispatching 53

Working capital 69

Works design much influenced

by material 164

Works management ; problems

of 39

Works order 72

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